Stock Index Spreading 0410

8/6/2019 Stock Index Spreading 0410

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IInntteerr--MMaarrkkeett SSttoocckk IInnddeexx SSpprreeaaddssApril 5, 2010

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Stock index futures are useful trading tools becausethey provide a proxy for taking on a position in aparticular national stock market or stock marketsector. Placing an inter-market spread between twostock index futures representing different nationalstock markets or sectors is an effective and facileway of expressing an opinion regarding theprospective relative performance of those twomarkets.

For example, if one believed that the high-techsector of the U.S. stock market might outperformthe market in general, one might place an inter-market spread by buying Nasdaq-100 futures andselling S&P 500 futures. Or, if one believed that theKorean economy and by implication stock marketwould outperform the U.S. economy and stockmarket, one might buy Kospi-200 futures and sellS&P 500 futures. This is facilitated by todays

modern electronic trading systems that allow marketparticipants to operate virtually around the clock,taking positions in American, Asian or Europeanmarkets with ease.

The purpose of this piece is to review the processand practice of inter-market stock index spreading.Accordingly, we will review some useful strategiesand indicators of possible opportunity in the U.S.,Asian and European stock index markets.

St o c k I n d e x F u t u r e s - CME Group offers activefutures contracts on a number of macro U.S. indexesincluding the S&P 500, Nasdaq-100, the Dow JonesIndustrial Average (DJIA), and the S&P MidCap 400.

Of course, liquid stock index futures are availablearound the globes in Europe where EUREX listsfutures on the pan-European Euro STOXX 50 and the

DAX Index, representing the German equity market.NYSE Euronext lists futures on the FTSE 100 andCAC-40, represent the UK and French national stockmarkets respectively.

Benchmark Asian stock index futures include theHang Seng Index offered on the Hong KongExchange (HKEx); KOSPI 200 futures and options

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The characteristics of these futures contracts aresummarized in the appendix below. The availabilityof these contracts makes it possible to execute andcarry inter-market spreads within or betweencontinents. The profit potential and risk of thesespreads will generally be a function of stock marketvolatility coupled with the correlation between thetwo indexes that are the subject of the inter-marketspread. As a rule, of course, more volatility and

reduced correlation produces greater risk exposure.

Compar i ng Vo l a t i l i t y Volatility is calculated asthe annualized standard deviation of logged dailyprice movements in a market. Characteristicvolatility levels vary across markets but the patternsare remarkably similar.

Stock Index Volatility

2007 2008 2009 2005-09

S&P 500 15.99% 41.10% 27.27% 29.95%

Nasdaq-100 18.66% 42.35% 26.46% 30.85%

DJIA 14.54% 37.87% 24.19% 27.28%

Midcap 400 16.20% 43.32% 32.38% 32.62%

Euro STOXX 50 15.90% 39.44% 28.08% 29.46%

DAX 15.52% 37.93% 28.43% 28.83%

FTSE-100 17.50% 37.59% 23.48% 27.51%

CAC-40 17.09% 40.67% 26.69% 29.80%

Hang Seng 25.99% 50.61% 32.44% 37.89%

KOSPI 200 23.12% 39.15% 25.77% 30.24%S&P CNX Nifty 25.27% 44.06% 33.41% 35.24%

Nikkei 225 18.26% 45.85% 27.37% 32.59%

Volatility rose to new heights in 2008 correspondingto the peak of the so-called sub-prime mortgagecrisis but has since declined across all markets.Asian indexes have generally been more volatilewhile European indexes have been a bit more stablethan their U.S. counterparts.

Corre la t ions There are generally high positivecorrelations between movements of major worldstock indexes. As shown in our appendix,correlations amongst the U.S. indexes are quite highranging from 0.9778 between the S&P 500 down to0.8812 between the Nasdaq-100 and DJIA. Thissuggests that the S&P 500 and DJIA are reasonable

correlations. We focus on correlations between theS&P 500 and other indexes to the extent that E-miniS&P 500 futures represent the most popular andliquid of CME Group stock index products.)

Correlations fall when comparing U.S. indexes toEuropean stock indexes and fall even further whencompared to Asian stock indexes. For example,correlation between the S&P 500 and the Euro

STOXX 50 was pegged at 0.8698; correlationbetween the S&P 500 and the Nikkei 225 was downto 0.7146; while correlation between the S&P 500and the S&P CNX Nifty was lower still at 0.5386.

Perhaps this may be explained by observing that theeconomies of the U.S., European Union and Japantend to be large and well established whileeconomies of Korea, Hong Kong and India tend to bemuch more dynamic.

The relationship between an investment in U.S.stocks and an investment in European or Asian stockmarkets is also affected by exchange rates. Thus,we translated stock index values into U.S. dollars(USD) as a common denomination and ran ourcorrelations again as shown in the appendix. Thesecorrelations do not change considerably fromcorrelations derived using only spot index valueswith some exceptions.

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and rupee as KRW or INR per USD by conventionalinterbank FX market practices.)

Almost paradoxically, considering the fact that thefinancial crisis began in the U.S., USD denominatedinvestments were considered a safe haven of sortsand the dollar generally strengthened during theheight of the crisis. But as the crisis subsided, theEUR, GBP, KRW and INR recommenced their rise vs.USD. In more recent months, the Europeancurrencies have weakened due to fiscal difficulties in

European union countries including Greece, Spainand Portugal.

therefore, exchange rates do not significantly affectthe correlations.

However, the correlation between the S&P 500 andthe Nikkei 225 drops from 0.7146 to 0.6220 whentranslating the indexes into a common currency.That might be explained by the negative correlationbetween movements in the Nikkei 225 and theJPY/USD exchange rate. Both series tend to rally

and fall in reasonably close lockstep.

This might be explained by the fact that theJapanese economy has historically been driven byexport power. A strong yen translates into a weakereconomy and vice versa. Note that we quote interms of JPY per 1 USD. Thus, the yen isstrengthening (weakening) when the quote declines(advances).

Spread Ra t i o and Pe r fo rmance In order toplace an inter-market spread, it is necessary toderive the so-called spread ratio. The spread ratiois an indication of the ratio or number of stock indexfutures that must be held in the two markets toequalize the monetary value of the positions held onboth legs of the spread. The following formula maybe used for this purpose where Value1 and Value2represent the monetary value (in a commoncurrency as necessary) of the two stock indexfutures contracts that are the subject of the spread.

Spread Ratio = Value1 Value2

For purposes of establishing the value of the futurescontract, we use the spot index value and not thequoted futures price as a rule. This practice servesto eliminate carry considerations from thecalculation.

Example: On December 31, 2009, the E-mini ($5)DJIA futures contract was valued at $52,140 (= $5 x10,428.05) while the E-mini S&P 500 futurescontract was at $55,755 (=$50 x 1,115.10). Thespread ratio may be calculated at 1.069 suggestingthat one might spread 10 E-mini S&P 500 futures vs.11 E-mini ($5) DJIA futures.

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spread ratio may be calculated at 0.839 suggestingthat one might spread 10 E-mini S&P 500 futures vs.8 E-mini S&P MidCap 400 futures.

Spread Ratio = ValueS&P 500 ValueMidCap= $45,163 $53,828= 0.839= 10 S&P 500:8 MidCap futures

Example: On December 31, 2009, the Euro STOXX50 index was quoted at 2,964.96 with the Euro rateat 1.4321 U.S. dollars per Euro. Thus, the EuroSTOXX 50 futures contract was valued at $42,461[= (10 x 2,964.96) x 1.4321]. The E-mini S&P 500

futures contract was at $55,755 (=$50 x 1,115.10).The spread ratio is calculated at 0.662 suggestingthat one might balance 7 Hang Seng futures with 10S&P 500 futures.

Spread Ratio = ValueS&P 500 ValueEuro STOXX 50= $55,755 $42,461= 1.313= 10 S&P 500:13 Euro STOXX 50

Example: On December 31, 2004, the Hang Sengindex was quoted at 14,230.14 with the HKD/USDrate at 7.7726 Hong Kong dollars per U.S. dollar.Thus, the Hang Seng futures contract was valued at$91,540 [= (HKD 50 x 14,230.14) 7.7726]. TheS&P 500 index was quoted at 1,211.92 and E-miniS&P 500 futures were valued at $60,596 (=$50 x1,211.92). The spread ratio is calculated at 0.662suggesting that one might balance 7 Hang Sengfutures with 10 S&P 500 futures.

Spread Ratio = ValueS&P 500 ValueHang Seng= $60,596 $91,540= 0.662

= 10 S&P 500:7 Hang Seng

These examples focus on spreads vs. E-mini S&P500 futures. We use the expression buy thespread to refer to a strategy where on buys E-miniS&P 500 futures and sells the other futures contract.The expression sell the spread refers to a strategywhere one sells E-mini S&P 500 futures and buys

we have calculated a spread ratio of 10 S&P 500futures to 11 DJIA futures. But it is perfectlyappropriate to reduce these ratios to simplify thespread. Thus, traders have been known to trade theS&P:DJIA spread in ratios of 1:1, 5:6 as well as10:11.

Because these spreads entail reduced risk relative tooutright positions in a stock index futures contract,

the CME Clearing House offers reduced performancebond or margin requirements of as much as 90% ofthe outright requirements on many of these spreadswhen placed in an appropriate ratio. These ratesvary from time to time and may be referenced onthe www.cmegroup.com website. Note that theseperformance bond reductions can only apply whenspreading between CME Group products.

F luc tua t ing Spread Rat ios Spread ratios provide

an indication of the appropriate way to construct aninter-market spread. Because they are dynamic,one must be aware of the current spread ratio whenplacing a trade. Spread ratios are also useful as ageneral indication of spread performance in terms ofboth volatility and direction.

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Spread Ratios vs. S&P 500

E-mini ($5) DJIA E-mini MidCapEuro STOXX 50 Hang SengKospi 200 Nikkei 225 ($)Nikkei 225 ()


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wide margin in recent years. The S&P 500:Kopsi200 ratio fell from 1.09 to 0.59 (-46%) while theS&P 500:Hang Seng ratio declined 39% during theperiod December 2004 to December 2009.Similarly, the DJIA (-4%), MidCap (-15%) and EuroSTOXX (-13%) indexes have outperformed the S&P500 from December 2004 to December 2009 asindicated by the ratios.

Fluctuating Spread Ratios vs. S&P 500

S&P500vs.

DJIA

S&P500vs.

Mid-Cap

S&P500vs.

EuroSTOXX

S&P500vs.

HangSeng

S&P500vs.

Kospi200

12/31/04 1.12 0.91 1.51 0.66 1.09

12/30/05 1.16 0.85 1.47 0.65 0.71

12/29/06 1.14 0.88 1.30 0.55 0.71

12/28/07 1.11 0.86 1.14 0.41 0.57

12/26/08 1.03 0.84 1.32 0.49 0.78

12/31/09 1.07 0.77 1.31 0.40 0.59

However, these trends have been very uneven overthe years and there have been many opportunitiesto either buy or sell these spreads to good effect.Let us consider some of the fundamental drivers ofinter-market spreads and useful indicators that aspread trader may wish to track.

Index Sector Weightings (3/ 25/ 10)

S&P 500 DJIA

Consumer Discretionary 10.05% 13.26%

Consumer Staples 11.29% 10.40%

Energy 10.99% 9.76%

Financials 16.32% 11.02%

Health Care 12.27% 8.34%

Industrials 10.42% 21.40%

Information Technology 18.90% 18.22%

Basic Materials 3.46% 3.62%

Telecom 2.81% 3.93%

Utilities 3.49% 0.00%

I ndex Cons t i t u t i on by Sec to r During the periodDecember 31, 2004 and March 23, 2010, the weeklychanges of the S&P 500 and DJIA exhibited a veryhigh correlation of 0.9778. This was, in fact, thehighest correlation we recorded amongst the variousU S E d A i t k i d d t d

constituent and compare the results. Theseproportions vary over time. But as an historicalmatter and as of March 25, 2010, the S&P 500 wasover-weighted with financial stocks.

US Stock Performance by Sector

2005 2006 2007 2008 2009

S&P 500 4.83% 15.61% 5.48% -36.55% 25.93%

DJIA 1.66% 18.79% 8.83% -31.46% 22.01%

Cons Disc -6.36% 18.50% -13.10% -33.20% 40.77%

Cons Staples 3.55% 14.39% 14.16% -15.22% 14.43%

Energy 31.18% 24.05% 34.07% -34.53% 13.61%

Financials 6.30% 18.92% -18.14% -54.23% 16.69%

Health Care 6.40% 7.43% 7.28% -22.60% 19.32%

Industrials 2.24% 13.16% 11.99% -39.40% 20.19%

Info Tech 0.97% 8.36% 16.25% -42.95% 61.30%

Materials 4.53% 18.69% 22.37% -44.95% 47.85%

Telecomm -5.33% 35.98% 11.83% -30.03% 8.21%

Utilities 16.65% 20.53% 19.12% -28.48% 11.30%

This is significant because the recent financial crisisexerted a particularly deleterious impact upon thefinancial sector of the economy which exhibited adecline of 54.23% in 2008. Thus, 2008 was anopportune time to be short the S&P/DJIA spread.

Example: As the financial crisis subsided and inanticipation of a financial sector bounce off thebottom, one might have bought the S&P 500:DJIAspread Assume you buy the S&P 500:DJIA spread

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Mar-10 E-miniS&P 500 futures

Mar-10 E-miniDJIA Futures

2/4/09Buy 20 @ 826.50

= $826,500Sell 21 @ 7,884

= $827,820

5/11/09Sell 20 @ 909.00

= $909,000Buy 21 @ 8,402

= $882,210

Profit of $82,500 Loss of $54,390

Net Pr ofit of $28,110

I n t r a -Day Sp read i ng The comparativeconstitution of two indexes impact spreads on along-term or strategic basis but can also impact aspread on an intra-day or tactical basis. One mightpay close attention to significant market-movingevents that impact particular stocks included in theindexes.

Clearly indexes that are more heavily weighted bythose particular stocks will be more heavily

impacted. Note that all 30 DJIA constituents arealso represented in the S&P 500. But because theDJIA only references 30 stocks, each of those stocksexerts a much greater impact upon the DJIA thanthe S&P 500. Of course, the reverse is not true the S&P 500 includes 470 stocks not represented inthe DJIA. This can be used as the basis for an intra-day spreading strategy.

Example: On March 10, 2010, the US equity markets

were up slightly on see-saw action. The DJIA closedat 10,567 up 3 points (+0.03%) while the S&P 500closed at 1,145.61, up 5 (+0.5%).

in the banking sector and suggested that dividendpayout ratios in banks are going up to 40% in 2-3years. Bank of America (NYSE: BAC) and JP Morgan(NYSE: JPM) were among the leading gainers on theDow. AIG (NYSE: AIG) in September 2008, surgedmore than 10% on recent strong sales.

The S&P 500:DJIA spread ratio rallied from about1.080 to 1.084 this day, mostly in the early morning

in the immediate wake of Boves comments. Thus,if you would have bought the spread (buy S&P 500futures and sell DJIA futures) at 8:45 (CT) when thespread ratio was at 1.081 and sold the spread at14:00 (CT) when the ratio was at 1.084, one mighthave earned a tidy profit. But you needed to reactquickly to Boves market moving comments.



8:45 Buy 10 @ 1,143.25= $571,625

Sell 11 @ 10,581= $581,955

14:00Sell 10 @ 1,145.50

= $572,750Buy 11 @ 10,565

= $581,075

Profit of $1,125 Profit of $880

Net Profit of $2,005

Example: On February 4, 2010, the US equitymarket experienced a massive sell-off on anunexpected advance in jobless claims and lingering

concerns over European sovereign debt issues. TheDJIA tanked by 268 points (-2.6%) to end the dayat a 3-month low of 10,002. Weakness in financialshares sent the S&P 500 (-3.1%) to close at1,063.11.

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yields on benchmark 10-year T-notes down 11 basispoints to 3.59% The CBOE VIX, which we mayregard as the market fear meter advanced to21%. Oil prices declined to $73.14 a barrel and goldfell to a 3-month low of $1,062/oz.

All 10 GISC industry sectors were down in excess of2.3% with the sensitive financial sector leading theretreat at -4.15%. As a result, the S&P 500:DJIA

spread ratio declined steadily throughout the dayfrom about 1.067 to 1.063. I.e., this was a goodday to be short the S&P 500:DJIA spread.

The S&P 500:DJIA spread ratio fell from about 1.067to 1.063 on February 4, 2010. Assume you wouldsell the spread (sell S&P 500 futures and buy DJIAfutures) at 10:30 (CT) when the ratio was at 1.066and cover the spread at 14:30 (CT) when the ratiowas at 1.064, one might have realized a nice profit.



10:30Sell 20 @ 1,071.25

= $1,071,250Buy 21 @ 10,036

= $1,053,780

14:30Buy 20 @ 1,063.75

= $1,063,750Sell 21 @ 9,984= $1,048,320

Profit of $7,500 Loss of $5,460

Net Pro fit of $2,040

Note that we applied this S&P:DJIA spread on a ratioof 20:21 rather than 10:11 as in the previousexample. The rationale is that the spread ratio wasat 1.066 when you might have placed the spread onFebruary 4th but rallied up to 1.081 on March 10th.

Cred i t Cons idera t ions Inter-market stock indexspreads are, of course, impacted by a variety offundamental economic factors, not the least of whichinclude monetary policy and credit conditions. In

fact, the spread between S&P 500 and S&P MidCap400 futures is often said to be driven by interestrates and credit conditions to a very considerableextent.

The explanation is found by examining the fundraising inclinations of larger companies such asth hi h i th S&P 500 l ll

than are large-cap stocks. However, therelationships may be rather complex.

During the period from 2004 through March 2010,the S&P 500:MidCap spread ratio generally declined.However, there were some considerable swingsalong the way which might be traced to creditmarket conditions. In particular, we might considerthe level of interest rates as driven by the target FedFunds rate as well as credit risk considerations. Wemay measure the latter factor by reference to a

credit spread or the rate on a 2-year interest rateswap (private credit risks) vs. 2-year Treasuries(public credit risks). Credit conditions are generallydeteriorating as this spread rises and improving asthe spread declines.

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2006 when US housing values peaked. Becausecredit was readily available even on gradually risingrates, it was generally profitable to sell the S&P500:MidCap 400 spread, i.e., to hold credit sensitivemid-cap stocks and short larger cap issues.

But credit concerns flared by mid 2006 and thespread ratio reversed upwards as midcap stocksbecame less attractive.

Interestingly, midcap stocks outperformed largercap stocks in early 2008 as the stock markettumbled precipitiously. This might be explained bythe fact that asset managers were rapidly liquidatinginvestments of all sorts to raise capital. Large capstocks tend to be more liquid and, therefore, bettersources of immediate cash than midcap stocks. Butmidcap stocks began to seriously underperform bylate 2008 as the scope of the crisis widened and the

credit spread spiked to its high point in October2008.

Throughout 2009, equity markets clawed back upand credit conditions improved. Outright interestrates declined as the Federal Reserve pushed thebenchmark target Fed Funds rate to anunprecedented low of 0-0.25%. Credit spreadsrapidly declined to pre-crisis levels or below.Consumer demand remains shaken but those credit

sensitive midcap stocks have outperformed the largecap sector by a considerable margin during the pastyear and a half.

Example: Assume you sell the S&P 500: MidCapspread (sell S&P 500 futures and buy MidCapfutures) on June 25, 2009 with the ratio at 0.799.By September 9, 2009, you cover the spread withthe ratio down at 0.770.

Sep-09 E-miniS&P 500 futures

Sep-09 E-miniMidCap Futures

6/25/09Sell 10 @ 916.50

= $458,250Buy 8 @ 573.00

= $458,400

9/9/09Buy 10 @ 1,032.50

= $516,250Sell 8 @ 669.80

= $535,840

Loss of $58,000 Profit of $77,440

N t P fit f $19 440

began to burst by mid 2006 as home valuesplummeted with the S&P/Case-Shiller Home PriceComposite Index of 10 U.S. cities downapproximately 30% from its peak. Mortgagedelinquencies and foreclosures rose tounprecedented levels and activity in the housingmarket ground down to a halt.

Mortgage investors, often involved in complex,

levered and generally illiquid structures includingstructured investment vehicles (SIVs) andcollateralized depository obligations (CDOs) saw thevalue of these investments decline quickly. Facedwith the need to raise capital, many of theseinvestors including levered asset managers turned tothe equity markets as a source of liquidity. Theresult was a 37% decline in the value of the S&P500 in 2008.

Distressed conditions on Wall Street quickly filtered

onto Main Street. U.S. GDP fell 6.4% in the 1stquarter 2009. U.S. unemployment soared to 10.2%by October 2009. Since those low points, however,conditions have begun to improve with 4th quarter2009 GDP at +5.7%. Unemployment remains high,but has backed off to 9.7%. Stock markets areoften regarded as a leading indicator of economic

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sovereign debt issues plaguing Greece, Spain andPortugal.

Japanese GDP fared very poorly during the crisis,declining by 10.3% and 13.7% during the first twoquarters of 2009. While many Asian economiesdepend on export activity, Japan may be moredependent than most and continues to carry a largebad debt overhang. Other Asian nations including

South Korea, China and India have been much moreresilient. In fact, the crisis was barely felt inbooming economies such as India and China.

F undamen ta l l y D r i ven S t ra tegy - Theperformance of national stock markets may bemonitored by examining spread ratios. Letscompare the performance of the S&P 500 to theEuro STOXX 50, the Hang Seng, Kospi 200 andNikkei 225 by studying the accompanying graphic.

During the period from 2005 through early 2010,the S&P 500 has essentially broken even vs. theEuro STOXX 50 and the Nikkei 225. But it hasunderperformed the Hang Seng and Kospi 200 by arather wide margin.

That may be explained by reference to

safe haven of sorts as the crisis peaked. Thus, theUSD generally advanced vs. other currencies andthe S&P 500 tended to outperform other stockmarkets as stocks generally declined.

Thus, one generally might buy other indexes and sellU.S. indexes during periods of sustained growth.During periods of contraction or serious economicdistress, one generally might sell these otherindexes and buy U.S. indexes. We reserveconsideration of spreads between the US stockmarket as represented by the S&P 500 andEuropean or Japanese markets for the next sections.

Example: In May 2008, the financial crisis was wellunderway. Thus, one might have sold Hang Sengfutures and bought S&P 500 futures. The spreadratio as of May 2, 2008 was 2.38 implying that oneshould sell 2 Hang Seng futures and buy 5 E-miniS&P 500 futures. This strategy might havegenerated a $37,502 profit as seen in our table.

Sep-08 E-miniS&P 500 futures

Sep-08 HangSeng Futures

5/2/08Buy 5 @ 1,417.50

= $354,375Sell 2 @ 26,120

= $335,108

-14%-12%-10%-8%-6%-4%-2%0%2%4%6%8%

10%12%

Q1'06

Q2'06

Q3'06

Q4'06

Q1'07

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

World Quarterly GDP Growth

USA Euro Union UK Hong Kong South Korea India Japan

0.200

0.400

0.600

0.800

1.000

1.200

1.400

1.600

Dec-04

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

S&P vs. Euro & Asian Spread Ratios

Euro STOXX 50 Hang Seng

Kospi 200 Nikkei 225 ()


10/14


Page 10 of 14

2008. This strategy might have generated a profiton both sides of the spread for a net $14,435 gain.


Mar-09 KOSPI200 Futures

12/5/08Sell 1 @ 871.50

= $43,575Buy 1 @ 133.00

= $43,575

2/13/09Buy 1 @ 820.00

= $41,000Sell 1 @ 155.70

= $55,435

Profit of $2,575 Profit of $11,860

Net Pr ofit of $14,435

S&P 500 vs. Euro STOXX 50 The S&P 500:EuroSTOXX 50 spread is deserving of some specialconsideration for several reasons. First, thesecontracts represent the two most liquid and activestock index futures contracts available today.Secondly, to the extent that US and Europeandaylight trading hours overlap for some hours on adaily basis, it is possible to leg into the spread whenboth futures markets are trading at the height oftheir liquidity. Note, however, that because S&P 00futures is a CME Group product while Euro STOXX50 futures are a EUREX product, cross-marginingbreaks are unavailable.

The S&P 500:Euro STOXX 50 spread ratio is highlyl d h l f h USD/EUR h

spread, i.e., buy S&P 500 futures and sell EuroSTOXX 50 futures in late 2009 through early 2010.

Example: On January 12, 2010, the S&P 500:EuroSTOXX 50 spread ratio was at 1.317 implying anappropriate spread ratio of 10:13. The USD/EURexchange rate was at 1.4486. By March 4, 2010,the spread ratio had rallied to 1.468 while the Euroweakened to 1.3581. One might have capitalized on

these circumstances by buying the spread, i.e.,buying S&P 500 futures and selling Euro STOXX 50futures.


Mar-10 EuroSTOXX 50 Futures

1/12/10Buy 10 @ 1,134.00

= $567,000Buy 13 @ 2,977.00

= $560,623

3/4/10Sell 10 @ 1,122.25

= $561,125Sell 13 @ 2,817.00

= $497,350

Loss of $5,875 Profit of $63,273

Net Pro fit of $57,398

S&P 500 vs . N i kke i 225 Like the S&P 500:EuroSTOXX spread, currency fluctuations can exert amajor impact on S&P 500:Nikkei 225 spreads. Fromearly 2005 through early 2006, the inter-marketfutures spread weakened on a weakening JPY value.The spread generally declined on a strengtheningJPY value from early 2008 through late 2009

although the trend was interrupted briefly by thesafe haven effect of USD denominated investmentsat the height of the financial crisis.

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Dec-04

May-05

Oct-05

Mar-06

Aug-06

Jan-07

Jul-07

Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

ExchangeRate

SpreadRatio

S&P:Euro STOXX Ratio vs. USD/ EUR

Spread Ratio USD/EUR

85

90

95

100

105

110

115

120

125

0 85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

ExchangeRate

SpreadRatio

S&P:Nikkei () Ratio vs. JPY/ USD


11/14


Page 11 of 14

strength of the yen and the Japanese economy asindicated by stock values. (Per interbank FXconventions, we are quoting the exchange rate interms of yen per US dollar the opposite of theEuro quote.)

Note that there are several Nikkei 225 futurescontracts available. The OSE lists a contract valuedat 1,000 x Index. CME Group lists both JPY and

USD denominated contracts valued at 500 and $5 xIndex, respectively. The two CME Nikkei contractsturn in very similar performance but may diverge asdiscussed in the next section. We used the CMENikkei 225 () contract in our graphic illustration.

Co r re l a t i on T rade The availability of both USDand JPY denominated Nikkei 225 futures at CMEGroup provides a unique spreading opportunity.This spread has become so popular that these two

CME Group products often post nearly identical dailyvolumes. This is called a correlation trade inreference to the strong negative correlation betweenthe Nikkei 225 index and the JPY/USD exchangerate. In our illustration, we quote the spread as theUSD value of the Nikkei 225 ($) contract less theUSD value of the Nikkei 225 () contract.

This bolsters the export driven Japanese economyand the Nikkei 225 may advance. If the USD shoulddecline vs. the JPY, U.S. consumer purchasing powerfor Japanese products decreases, thus detractingfrom Japanese economic strength and the Nikkei225 index may decline.

Because of the more dynamic nature of the USDversion of the contract, there is often a premium of

up to 100 index points in the value of the Nikkei 225($) vs. Nikkei 225 () futures. Professional tradinggroups including hedge funds follow this relationshipclosely as part of their short-term correlation tradingactivities. This spread offers significant cross-margining efficiencies currently in the vicinity of85%.

Conclusion In todays electronically interlockedworld economy, investors frequently rotate

investment between market sector or even betweennational economies. Inter-market spreads betweenstock index futures facilitate these rotationalstrategies nicely.

These inter-market spreads may be pursued basedupon a number of different analytical techniques.For example, one may pursue spreads between theS&P 500 and DJIA by analyzing the constituencies ofthe two indexes. Spreads between large cap stocks

represents in the S&P 500 vs. mid-cap stocks asrepresented in the S&P MidCap 400 may bemotivated by credit conditions.

Spreads between different national economies suchas an S&P 500 vs. Euro STOXX 50 spread may bemotivated by fundamental international economicconditions. These international spreads may befurther impacted by the effect of exchange rates.Finally, we have reviewed a correlation tradebetween USD and JPY denominated Nikkei 225futures contracts as offered at CME Group.

For more information, please contact

John W. Labuszewski, Managing DirectorResearch & Product Development

80

85

90

95

100

105

110

115

120

125

130

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

Dec-04

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

JPY/USDExchangeRate

N

ikkei($)lessNikkei()

Nikkei $ - Spread vs. JPY / USD Rate

Nikkei ($) less Nikkei () JPY/USD


12/14


Page 12 of 14

Appendix of Miscellaneous Data

Comparing Stock Index Futures(As of 3/ 23/10)

Futures Contract ExchangeContract

MultiplierIndex Currency

Currency

Value

ContractValue(USD)

E-mini S&P 500 CME Group $50 1,174.17 USD 1.00 $58,709

E-mini Nasdaq-100 CME Group $20 1,963.20 USD 1.00 $39,264

E-mini ($5) DJIA CME Group $5 10,888.83 USD 1.00 $54,444

E-mini S&P MidCap 400 CME Group $100 799.95 USD 1.00 $79,995

Euro STOXX 50 EUREX 10 2,910.52 EUR 1.3499 $39,289

DAX EUREX 25 6,017.27 EUR 1.3499 $203,068

FTSE 100 NYSE Euronext 10 5,673.63 GBP 1.5048 $85,377

CAC 40 NYSE Euronext 10 3,952.55 EUR 1.3499 $53,355

Hang Seng HKEx HKD 50 20,987.78 HKD 7.7620 $135,196

KOSPI 200 KRX KRW 500,000 220.09 KRW 1,136.90 $96,794

S&P CNX Nifty NSE INR 50 5,225.30 INR 45.5950 $5,730

E-mini S&P CNX Nifty * CME Group $10 5,225.30 USD 1.00 $52,253

E-micro S&P CNX Nifty * CME Group $2 5,225.30 USD 1.00 $10,451

Nikkei 225 TSE 1,000 10,774.15 JPY 90.40 $119,183

Nikkei 225 CME Group 500 10,774.15 JPY 90.40 $59,592

Nikkei 225 CME Group $5 10,774.15 USD 1.00 $53,871

* Contract to be listed at CME Group on a to-be-determined date during 3rd quarter 2010


13/14


Page 13 of 14

Correlations between Spot Index Values(Sampled Weekly from 12/ 31/ 04-3/23/ 10)

S&P 500Nasdaq-

100DJIA

Midcap400

EuroSTOXX

50DAX

FTSE-100

CAC-40HangSeng

KOSPI200

S&PCNXNifty

Nikkei225

S&P 500 -

Nasdaq-100 0.9067 -

DJIA 0.9778 0.8812 -

Midcap 400 0.9560 0.9040 0.9104 -

Euro STOXX 50 0.8698 0.7805 0.8542 0.8370 -DAX 0.8717 0.7977 0.8549 0.8475 0.9719 -

FTSE-100 0.8695 0.7651 0.8538 0.8414 0.9423 0.9159 -

CAC-40 0.8614 0.7758 0.8439 0.8295 0.9828 0.9506 0.9501 -

Hang Seng 0.6416 0.6174 0.6089 0.6564 0.6754 0.6621 0.6730 0.6612 -

KOSPI 200 0.5919 0.6201 0.5678 0.6428 0.6306 0.6523 0.5993 0.6057 0.7012 -

S&P CNX Nifty 0.5366 0.5386 0.5277 0.5526 0.6095 0.6074 0.5606 0.5844 0.6619 0.6022 -

Nikkei 225 0.7146 0.6661 0.7039 0.7084 0.7554 0.7454 0.7306 0.7507 0.7311 0.7296 0.5699 -

Correlations between Spot I ndex Values Translated from Native Currency to USD(Sampled Weekly from 12/ 31/ 04-3/23/ 10)

S&P 500Nasdaq-

100DJIA

Midcap400

EuroSTOXX

50DAX

FTSE-100

CAC-40HangSeng

KOSPIS&PCNXNifty

Nikkei225

S&P 500 -

Nasdaq-100 0.9067 -

DJIA 0.9778 0.8812 -

Midcap 400 0.9560 0.9040 0.9104 -

Euro STOXX 50 0.8496 0.7694 0.8210 0.8334 -

DAX 0.8484 0.7813 0.8192 0.8391 0.9719 -

FTSE-100 0.8309 0.7385 0.8077 0.8153 0.9284 0.9060 -

CAC-40 0.8441 0.7670 0.8139 0.8286 0.9828 0.9506 0.9324 -

Hang Seng 0.6418 0.6178 0.6090 0.6567 0.7164 0.7011 0.7167 0.7060 -

KOSPI 0.6309 0.6424 0.6008 0.6800 0.7017 0.7160 0.6816 0.6751 0.7317 -

S&P CNX Nifty 0.5492 0.5468 0.5342 0.5646 0.6591 0.6518 0.5995 0.6381 0.6807 0.6408 -

Nikkei 225 0.6220 0.5610 0.6061 0.6170 0.7034 0.6877 0.6832 0.7047 0.6804 0.6822 0.5175 -


14/14


Page 14 of 14

Copyright 2010 CME Group All Rights R eserved. CME Group, the Globe Logo, Globex and CME are trademarks of Chicago Mercantile Exchange Inc. CBOTis the trademark of the Board of Trade of the City of Chicago. NYMEX is trademark of New York Mercantile Exchange, Inc. The information herein is taken fromsources believed to be reliable. However, it is intended for purposes of information and education only and is not guaranteed by CME Group Inc. or any of itssubsidiaries as to accuracy, completeness, nor any trading result and does not constitute trading advice or constitute a solicitation of the purchase or sale of anyfutures or options.

Unless otherwise indicated, references to CME Group products include references to exchange-traded products on one of its regulated exchanges (CME, CBOT, NYMEX,COMEX). Products listed in these exchanges are subject to the rules and regulations of the particular exchange and the applicable rulebook should be consulted.

This document contains "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based onmanagement's current expectations and involve risks and uncertainties, which may cause results to differ materially from those set forth in the statements. Noforward-looking statement can be guaranteed and actual results may differ materially from those projected. We undertake no obligation to publicly update anyforward-looking statement, whether as a result of new information, future events, or otherwise. Forward-looking statements in this document should be evaluatedtogether with the many uncertainties that affect CME Group's business, particularly those mentioned in the risk factors and cautionary statements in CME Group'smost recent Annual Report on Form 10-K and in its most recent Quarterly Reports on Form 10-Q.

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