A Pricing Methodology for CAC40 AND DAX Futures

Posted: April 4, 2010 in Index futures
Tags: , , , , ,

Today, I present a pricing method for the EUREX DAX futures and the CAC-40 equity index futures.  This method I developed in conjunction with chapters 5-7 of Katsano’s book “Intermarket Trading Strategies” in which a correlation analysis between US and international equities is performed and the claim is made that US stock market movements lead the international stock markets on a daily basis.  First, cover the contract details given by the hyperlinks below:

DAX futures information: http://www.eurexchange.com/trading/products/IDX/DAX/FDAX_en.html

CAC-40 information: http://www.euronext.com/trader/contractspecifications/derivative/wide/contractspecifications-2830-EN.html?euronextCode=FCE-PAR-FUT

The potential strategy now would be as follows

  1. Get a list of active stock members of the CAC-40 and DAX.
  2. Find any co-listed US ADRs that have sufficient liquidity to be an accurate price (here we are really only worried about the close).
  3. If no ADR for that member exists, we have a few options.  (1) A weighted price of the percentage of the sector in the index it represents replaced by its US equivalent or a close US relative.
  4. Construct an equivalent pricing basket by taking into effect the weightings*prices.
  5. ACCOUNT FOR DIVIDENDS!
  6. Capture the closing prices and compute the basket price and this should be the equivalent of the future CAC and DAX prices if you have performed the computation as if it were an index and if the assumptions of Katsano’s hold.
  7. From this you should have a rich/cheap to the index futures that are currently trading.

Example screenshot from my version:

There is a dated sample spreadsheet in the SourceForge repository (https://sourceforge.net/projects/autospreader/files/ Files are DAX and CAC40-DynamicPricing.xls) that covers the specifics of this computation.  I gave out a dated version so that you will have to learn from doing the work of updating it.  Feel free to ask questions along the way if you encounter roadblocks.

Reference: “Intermarket Trading Strategies” by Katsanos

This book is a decent read.

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Comments
  1. _N says:

    How did that strategy work out for you? Are you still trading it?
    Is it still viable after transaction costs (bank transaction costs / retail transaction costs?)?

    Regards
    _N

    • autospreader says:

      It did quite well for about 3 years. I stopped trading it because the hours were terrible as I am located in the US and have to monitor the trade until the open of the Europe session. It was viable on a net profit basis; I was amazed how such a simple strategy performed so well.

  2. IceViking says:

    Followed you from NP. Great Blog. I’m an undergrad in Comp. Engineering. I will try playing with this when I get a moment. Keep it coming:)

  3. B says:

    Thanks a bunch for sharing. I have tested it and get a return of roughly 8% p.a and vol of 5%, unlevered, if I close my position at open. Have you experienced any dilution of returns because more people use the strategy?

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