The US Futures Exchange has launched its first-ever set of binary futures contract on a specific 'event' to occur in the near future.
The 'event' for the contract is the proposed merger of Chicago Board of Trade with either Chicago Mercantile Exchange or with the Intercontinental Exchange. The two possible events are reflected through two contracts.
One contract denotes that CBOT will merge with CME, while the other contract denotes that CBOT will merge with ICE.
According to USFE, the exchange saw an opportunity in the event for the people to hedge the risks associated with either merger possibility.
Though the contract may cater to a small community of those associated with the futures industry, the event has huge economic implications for the US economy and financial consequences for the industry associates.
This type of contract requires certification from the Commodity Futures Trading Commission. Unlike the general futures contracts, a buyer/seller of the Binary Event Futures takes a 'yes' or a 'no' position respectively on whether an event will take place on or by a specified date.
The event
is well established prior to listing by exchange rules, which operate to dictate the settlement of the contract before expiry.
The contract is quoted in probability points from 0 to 100 with each point reflecting $10 of contract value. The tick increment is 0.5 probability points or $5.
The contract is cash settled and the settlement price is a pre-specified value of $1,000 if the event occurs, otherwise expires to $0 (zero).
The daily settlement price of the BEF contract will be based on trading conditions. Thus, if the defined event occurs, BEF contract buyer is entitled to a pre-specified cash payout from the contract seller.
If one purchases a CBOT-CME merger contract, and CBOT does in fact merge with the CME on or before December 31, the purchaser is entitled to the full contract value being $1,000 in this case.
If the probability points/contract price reflect that the probability of either event taking place on or before December 31 is low, the exchange plans to launch another set of contracts with the same event as the underlying with June 2008 as the new deadline. The BEF will begin trading on April 20.