Price Discovery

One of the more challenging aspects of a market disruption is finding quotes, and determining clearing levels on risk. To that end I'm providing recent quotes on the 11 CME regional contracts. In addition, I've converted bids and offers into "% vs Spot" to show how the different contracts are priced relative to today's index values.

A few notes:

  • I'm not saying that these are the levels that the contracts "should" trade. Instead, I'm trying to prompt discussion on the absolute levels of forward contracts, as well as to stir the pot on the price of one forward region vs. another. I'm putting forward my opinions, and am willing to back them up with some capital for (very) small exposures. While I'm open to trading on any of these levels, (subject to market moves, or earlier trades) my hope is that users react with higher bids and lower offers. In effect, I'm trying to address price opacity by disclosing where I'd trade, to "bound" discussion on where prices "should" be. Ideally, I'd like to trade 5-10 lots, tout them on social media, and have readers react to the traded levels, with either more bids or offers.
  • I'm not saying that these are where the index levels are headed. I've written before that I believe that contracts will clear at a discount to expectations, as there are more natural shorts than natural longs. That's particularly true in periods of market distress, as the number of users looking to hedge increases, while natural longs have a bigger menu of assets to select from when traders dump positions. Should volatility decline, I would expect the discount to expectations to decrease.
  • I'd encourage users to submit their trading/hedging "axes" as with the current volatility even levels outside these price ranges might be met.
  • Recall that trading can be done on an outright basis, or views can be expressed via calendar spreads or intercity spreads. I'm open to all of the above.
  • Finally, I'm open to offering OTC home price index agreements (long or short) on ~50 other cities, but expect bid/ask spreads to be wide until there's better price discovery on these publicly traded contracts.

Please feel free to contact me if you have any questions on this blog, or any aspect of hedging using home price index derivatives.

Thanks, John