J.P. Morgan and Deutsche Bank separately plan to start offering derivatives based on economic statistics, such as inflation and productivity, published by the U.S., European and Japanese governments. The conracts will be based on a model, dubbed the parimutuel digital call auction model, which prices risk based on a commitment of capital and the cost of hedging the position. The products will allow investors to trade and get pricing on economic indicators, according to officials at both firms. They will start offering digital options and digital spread trades by year-end.
This is an entirely new category of risk management and investment product, according to Hal Herron, head of European global markets at Deutsche Bank in London. The product was developed by technology company Longitude, which has sold the U.S. rights using its pricing model to J.P. Morgan and the European and Japanese rights to Deutsche Bank. "This is something that was not previously possible," Herron added.
Kevin Rodgers, global head of foreign exchange options at Deutsche Bank in London, said launching the technology will begin as an education process. The firm plans to begin using Longitude on its internal desks then extend it to proprietary traders and eventually hedge funds and other sophisticated money managers. Rodgers described Longitude as "another string in the investor's bow," because it will enable hedging inflationary risk based on real numbers.
Christopher Harvey, managing director of derivatives at J.P. Morgan in New York, said the firm will launch the new derivatives products based on U.S. economic statistics before the end of the year, but declined to detail an example product.
