Dow Jones Futures

[cascot]

On the Societe Generale warrants site they base the price of the Covered Warrants they offer on the Dow Jones on the current DJIA futures price. I had believed that the only futures available on the DJIA were those traded on CBOT (Dow Mini's, etc). Well today CBOT is closed for Thanksgiving yet the SG site still had a quote for the Dow which was different from the closing price of the futures and it moved a few times throughout the trading day. CBOT trading only resumed tonight at 6:15 CST.

Does anybody know what they could be basing that quote on?

Thanks.

 

[grantx]

Cascot,

Warrants are basically long term options which, if I’m correct, can’t be exercised prior to expiry.

Warrants, offered by the likes of SG, are effectively otc (over-the-counter) in that SG determines the terms, contract specifications and price/value, rather than the price reflecting a market consensus (within reason - you can bet you will not see arbitrage opportunities). Therefore, they also determine “market-hours” – whether a corresponding market is closed is irrelevant.

The quote could be based on supply/demand and the degree of their actual or potential exposure.

Grant.

 

[cascot]

Thanks for your reply Grant.

I understand about the price of the actual warrant, however they also include a quote of the underlying market, in my case the Dow Jones, which as I said opened at a price higher than the futures close and changed a few times when to my knowledge no Dow futures market was trading.

Oh well, it's no big deal, I was just curious.

Thanks again.

 

[grantx]

Cascot,

I think this is how it works in principle. I’m assuming 1 warrant is for 1 x index.

Assume SG are long 1000 futures at a close of 10,000. The market is closed the next day but they maintain a market. The prices of their warrants will reflect , inter alia, their net exposure (long the underlying), perception of risk, view of direction, supply/demand assumptions.

Ignoring the spread, this could lead to an underlying price, eg 10,050. So for every warrant they sell (you buy) their upside breakeven price (above which they start to lose money) = 10,000 + 50 = 10,050. They also have a downside breakeven price (below which they start to lose money) at 10,000 – 50 = 9,950. If demand is particularly strong they’ll increase their prices until a point of equilibrium is reached – Price so high, no more buyers.

Would a strong demand expose them to a greater than anticipated risk? I doubt it, for two reasons:

warrants are a relatively expensive method of achieving market exposure; the majority of, if not all, clients will be private/retail who are wrong most of the time.

Grant.