While the CME Case Shiller contracts cover many of the largest cities, I frequently get asked about hedging either other regions, or more narrowly defined geographic areas with the ten traded Case Shiller regions. I believe that, in concept, OTC trades can be structured between two willing, informed parties, that will allow a user to hedge any index, using forwards and options.
The table below is my recent effort to put prices on forward trades and options (for Feb. 2020 expiration), for the ten public Case Shiller indices that make up the balance of the Case Shiller 20-city index. I’d love to get feedback on the price levels (both forwards and options) and would be happy to pursue an OTC trade. Again, I’m showing ten Case Shiller regions, but this should work for any city/ MSA/Zip Code. Please send your inquiries as I’m looking to “build a book” of parties looking to hedge exposures. (BTW -the more generic and publicly accessible the index -e.g. Seattle Case Shiller -the more likely I, and others, will be able to do analysis and find someone else interested.)
A few nits about this OTC effort. Since there is no public forward market, there is quite a bit more price-discovery risk, so I’m offering to do trades at $100/point (not the $250/point used on the CME platform.) Further, for both the forwards and options, I’m going to use a band of +/- 10% around the strike price for maximum payouts. In addition to reducing risk, it will also make easier to collateralize any positions.
Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog, or any aspect of hedging home price indices.
Thanks, John