CBOT Launches Real Estate Index Futures

by Phillip Morton, Investors Offshore.com

17 January 2007

The Chicago Board of Trade (CBOT) has announced plans to launch a new stock index futures contract based on the Dow Jones US Real Estate Index.

CBOT says that the electronically-traded Dow Jones US Real Estate (DJUSRE) Index futures contract, to be launched during the first quarter of 2007, will allow market participants to capitalize on changes in the real estate sector of the stock market, and better manage commercial real estate exposure.

The new contract, to be launched under a licensing agreement between the CBOT and Dow Jones, will settle to the value of the Dow Jones US Real Estate Index, an index comprised primarily of Real Estate Investment Trusts (REITs). REIT securities serve as an accurate proxy for the underlying US commercial real estate market because lease rates, vacancies, development costs and property transaction values are all reflected in REIT share prices.

Robert D. Ray, Senior Vice President of Business Development at the CBOT commented:

“Commercial real estate remains one of the largest classes of tradable assets not currently served by an exchange-traded futures instrument. We developed this contract after researching the US commercial real estate market and conducting various conversations with real estate portfolio managers and pension funds who seek new avenues for managing the risks associated with property ownership."

"Moreover, since the underlying instrument is an equity index, it also provides investors with an efficient means to express their views on movements in the real estate market, with the added advantages of transparency, leverage, liquidity and the ability to more efficiently short the market.”

Michael A. Petronella, President, Dow Jones Indexes, added:

“The Dow Jones US Real Estate Index is a transparent and rules-based tool to measure the performance of a U.S.-based real estate equity portfolio. As a benchmark recognized by commercial real estate owners and foreign investors seeking exposure to US real estate markets, this index is an ideal underlying for a futures contract."

The new DJUSRE Index futures contract will trade on the CBOT electronic trading platform from 6:15 p.m. – 4:00 p.m. CT (the following day), Sunday through Friday. The contract, which will be settled in cash, has a value equal to $100 multiplied by the value of the DJUSRE Index. The CBOT is also creating a market maker program for the new DJUSRE Index futures contract to ensure a two-sided market will be available to market participants.

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