Variance Futures

 

Background

The client lists a variance futures contract that settles to 3 months of the realized variance of some indexes.  The contract is similar in nature to realized variance swap contracts that are traded in the OTC market; however, there are two notable differences.  First, the OTC swap contract is quoted in volatility points for a Vega notional amount while the Client’s futures contract is quoted in variance points for a stated number of futures contracts.  The second difference arises from the collateral treatment of an exchange traded futures contract compared to that of an OTC swap contract.

 

A major futures trading firm in Chicago has proposed a new variance futures contract to be traded at Client that is the economic equivalent of the OTC variance swap and is quoted using the same convention.  The proposed contract will require the client to transform the trade price and quantity traded of a matched trade to a separate price and quantity to be cleared.

 

Goal

The goal of this project is to re-launch the client variance contract with the ability to quote the contract in terms of volatility points and clear the contract in terms of variance values.

Solution

CTI is engaged in the full application development life cycle – requirement, analysis, design, implementation, testing and production roll out. This was a six-month project aimed at significantly improving the trading volume for variance futures on client’s exchange. Client wanted to reuse the existing options trading platform to handle order booking, routing, and trade processing for Futures products. CTI’s onsite project manager and offshore team worked together to closely analyze the existing framework and leverage it to provide trading logic for futures session.

Impact

Futures trading is a focus of our client. Exchange and trading firms will benefit by having a future product that meets the OTC convention, which in turn will increase liquidity for variance futures products. It will diversify client’s product line, and complement options trading. It will also leverage client’s influence on the futures market.

 

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