AQUA: ASX’s new market September 17, 2007
Posted by James Webster in : finance , 1 comment so farEither in reaction to the sooner-or-later entry of AXE ECN and liquidnet into the Australian equity market business, or through simply a desire to innovate and provide more options to investors, the ASX has issued a consultation paper revealing their plans for AQUA, ‘a market for investment products and managed funds’. It was actually issued in July this year and the due date for submission responses closed in early August, I have only just managed to find time to read it!
Its not a new idea, for example the London Stock Exchange lists many structured products and exchange traded funds. ETFs are big on many other global exchanges and there are already a few index ETFs on the ASX. Nevertheless one proposed aspect of AQUA will make it a welcome one.
The ASX will be splitting AQUA up into two markets; the Trading Market and the Quotation Market. The Trading Market will allow brokers to buy and sell units in the listed funds and products in the same way as shares. The Quotation Market however will provide only a facility for price discovery and settlement of off-market trades. About a year ago I worked on a system to support the unit pricing and unitholder transactions of a structured product where the underlyings were managed funds… were the Quotation Market around then (assuming the funds were listed on it) getting the daily unit prices of these funds as input to our own unit price calculations would have been much simpler.
There are some interesting questions asked by the paper regarding Net Asset Value and disclosure such as how often a fund’s NAV should be disclosed and should it vary depending on the style of the fund… a long-only fund investing in Australian equities only can easily provide a daily NAV, whereas a hedge fund-of-funds product may only be able to quote it monthly in arrears (i.e. when it knows the value of the funds it has itself invested in). If funds with a long asset valuation cycle are listed on AQUA’s Trading Market at what price will they trade? Will they typically trade at a discount to NAV as frequently happens with Listed Investment Companies on the ASX or will AQUA force all trades on the Trading Market to occur at the last unit price set by the fund manager?
The Truth is Out There… September 6, 2007
Posted by James Webster in : science , add a commentLet me interrupt the stream of financial markets & technology related news to bring you something completely different…
Errr… does anyone remember Purity Control? Where are Scully and Mulder when we need them?!
Derivatives on airline tickets September 3, 2007
Posted by James Webster in : finance , 1 comment so farA couple of recent conversations I’ve had have been around airline tickets and what derivatives over airline tickets might look like. For any given airline, route, date, and class of travel, a ticket already has the property of fungibility. The other essential property to become a tradable commodity that airline tickets do not have at present is transferability. I imagine this is primarily due to security concerns but perhaps there are other reasons as well.
The presence of an active derivatives market over airline tickets would probably make it harder for airlines to segment their fare structures since so much of the segmentation revolves around the conditions under which a ticket can be changed for another date, route, etc. An options contract over a ticket could achieve the same thing with the premium for more flexible tickets (and risk) instead going to the option writer. However without the ability to hedge their exposures through purchasing a transferable pool of tickets for delivery to the option buyer the writers are unlikely to want to bear the risk.
What would an option over an airline ticket look like? In its most simplest form it would be a simple call/put as per standard vanilla equity options. The contract would probably specify certain parameters of the underlying ticket such as route and class, but other features such as airline and date of travel could be at the whim of the counterparty that delivers the ticket should the option be exercised. More complicated derivatives would be possible however, such as one tied to the on-time arrival of a flight.
How would you price such an option? The typical cost of existing tickets would certainly be one factor, sensitivity to swings in the price of jet fuel contributing to fuel surcharges could be another. Probably the popularity of the route at a given time of year might cause the option price to change significantly as it approaches expiry… options over routes that become heavily booked closer to the date of departure would probably increase in value. Are there any quants in the audience with other thoughts?
What would the overall consequences of such a derivatives market be? Would there be any negative consequences?
Given that some airlines frequently hedge their exposures to the price of jet fuel why cannot we hedge our exposure to the economic costs of our air travel? Of course there are also environmental costs of our air travel for which we should take more responsibility. However between airline ticket derivatives and weather derivatives (see also Investopedia and Weatherbill) you could synthesize a travel insurance policy covering your general satisfaction with your travel arrangements, providing a payout in the event of poor service or poor weather.
I have found one patent covering the concept of airline ticket derivatives but I am sure other work has been done in this area.