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The CME Group Risk Management Handbook: Products and Applications


Praise for The CME Group Risk Management Handbook

"Wow! The CME Group Risk Management Handbook is a 'ten strike' and long overdue. A must-read and reference for the risk management industry!"
Jack Sandner, retired chairman of CME Group, member of the Executive Committee

"This is a powerful book for its integration of futures and options markets with an understanding of the whole economy. It is an eye-opener to see how central these markets are to our economic lives."
Robert J. Shiller, Okun Professor of Economics, Yale University; Chief Economist, MacroMarkets LLC

"Risk management is essential to successful investing, and The CME Group Risk Management Handbook provides the essentials for understanding risk management. In the wake of the financial turmoil of the last few years, managing risk should be part of any investment program. Among the key elements of risk management are stock index, bond, currency, and commodity futures as well as a growing number of futures, options, swaps, and other financial instruments built on indices tracking housing prices, weather conditions, and the economy. The CME Group Risk Management Handbook offers a comprehensive guide for using all of these to better manage financial risks."
David M. Blitzer, PhD, Managing Director and Chairman of the Index Committee, S&P Indices

"Dare we ignore the advice of a financial institution, the largest of its kind in the world, that navigated the recent financial crisis without the aid of a single TARP dollar or access to the Fed's cheap loans? For CME Group, risk management has meant risk minimization as it enters its 151st year of life and its 85th year of central counterparty clearing without a single trading debt unpaid. It has been, and continues to be, a leader by example."
Philip McBride Johnson, former CFTC chairman

"For the first time, a comprehensive handbook outlining the futures market in today's world is available. The CME Group Risk Management Handbook covers futures basics for the novice trader, while the veterans will benefit from an in-depth look at options and hedging. This handbook is a necessity for any professional, investor, or other market participant seeking to manage risk in the perpetually changing futures market."
H. Jack Bouroudjian, CEO, Index Futures Group

JOHN W. LABUSZEWSKI is Managing Director of Research and Product Development at CME Group. Labuszewski came to CME from Nikko Securities International, where he was general manager of the asset management division. He had previously worked for Fenchurch Capital Management, Refco, and the Chicago Board of Trade. Labuszewski is coauthor of four previous industry-related texts. He earned an MBA from the University of Illinois.

JOHN E. NYHOFF is Director of Financial Research and Product Development at CME Group. He has lectured extensively in the interest rate derivative product area, and has taught financial futures and options and related courses at DePaul University and several other Chicago-area colleges. Nyhoff is coauthor of two industry-related texts: Trading Options on Futures and Trading Financial Futures (both from Wiley). He holds a master's in financial economics from the University of Rochester, a master's in economics from Northern Illinois University, and a bachelor's degree in economics from DePaul University.

RICHARD CO is Director of Financial Research and Product Development at CME Group. He joined CME in 1999. Dr. Co received a PhD in economics from the University of Chicago in 2000 and is a Chartered Financial Analyst.

PAUL E. PETERSON is Director of Commodity Research and Product Development at CME Group. He joined CME in 1989. Before that, Peterson served as vice president, research, for Brock Associates from 1988 -1989; manager, education and marketing services, for the Chicago Board of Trade from 1986-1988; and manager, market analysis, for the American Farm Bureau Federation from 1983-1986. Peterson holds a PhD in agricultural economics from the University of Illinois and has authored a number of articles in professional journals and business/trade publications.

CME Group is an international marketplace that brings together buyers and sellers on its trading floors and CME Globex around-the-clock electronic trading platform. CME Group operates leading derivatives exchanges including CME, Chicago Board of Trade, and NYMEX, offering futures contracts and options on futures, in diverse product areas including interest rates, stock indexes, foreign exchange, agricultural, energy, and metals.

Foreword by Leo Melamed.

Prologue by Terry Duffy.


Introduction by Craig S. Donohue.

Chapter 1 Futures Market Fundamentals.

What Is a Futures Contract?

Overview of Popular Financial Futures Contracts.

Anatomy of a Futures Transaction.



Chapter 2 Order Entry and Execution Methodologies.

Open Outcry or Pit Trading.

Introduction of the CME Globex Platform.

Trade Matching Algorithms.

About Options Markets.

Ex-Pit Trading.



Chapter 3 Role of the Clearinghouse.

Financial Safeguards.

Financial Surveillance.

Default by a Clearing Member.

Resources Backing CME Group Clearing System.

Customer Protection.

Disaster Recovery and Business Continuity.

Rule Enforcement.

Financial and Regulatory Information Sharing.


Chapter 4 Currency Futures: The First Financial Futures.

Evolution of Foreign Exchange Marketplace.

Over-the-Counter Currency Trading Vehicles.

Exchange-Traded Currency Futures and Options.

Foreign Exchange Market Growth and Trends.



Chapter 5 Stock Index Futures: The First Financial Futures.

Mechanics of Stock Index Futures.

E-Minis versus Exchange-Traded-Funds.

Pricing Stock Index Futures.

Spreading Stock Index Futures.

Hedging with Stock Index Futures.

Portable Alpha Strategies.



Chapter 6 Eurodollar Futures: Interest Rate Market Building Blocks.

Eurodollar Futures Market.

Speculating on Shape of Yield Curve.

Term Treasury/Eurodollar (TED) Spreads with Futures and Options.

Interest Rate Swap Market.

Growing Up Together.

Pricing Relationship.

Hedging Techniques.


Technical Appendix: Complications and Shortcuts for Pricing and Hedging Swaps.


Chapter 7 Understanding U.S. Treasury Futures.

Coupon-Bearing Treasury Securities.

Treasury Futures Delivery Practices.

Measuring Risk of Coupon-Bearing Securities.

Risk Management with Treasury Futures.

Macro Hedging with Treasury Futures.

Trading the Yield Curve with Treasury Futures.



Chapter 8 Commodities: Backbone of the Futures Industry.

What Are Commodities?

Grain Markets.

Livestock Markets.

Energy Products.

Precious Metals.

The Forward Curve.

Intermarket Commodity Spreading.

ClearPort Over-the-Counter Clearing Facility.


Appendix: Major Commodity Market Specifications.

Chapter 9 Alternative Investment Market fundamentals.


Residential Housing Futures.

Economic Indicators.



Chapter 10 Fundamental Market Indicators.

Why These Indicators?

Trading Volumes.

Volatility: Daily Net Change.

Volitility: Daily High-Low Range.


Appendix: Economic Indicator Descriptions.


Chapter 11 Technical Analysis Primer.

Why Technical Analysis?

Interpreting Charts.

Elliot Wave Theory.

Intraday Trading Techniques.

Trend-Following Systems.


Chapter 12 Fundamentals of Option Markets.

What is an Option?

Mathematical Option Pricing Models.

Historic and Implied Volatilities.

Measuring Option Performance.


Chapter 13 Option Trading Strategies.

Option Spreads.

Horizontal Spreads.

Diagonal Spreads.

Comparing Verticals, Horizontals, and Diagonals.

Weighted Spreads.

Volatility-Driven Strategies.

Specialty Option Strategies.

Matching Strategy and Forecast.


Chapter 14 Hedging with Options.

Baseline Futures Hedge.

Buying Protection with Puts.

Yield Enhancement with Calls.

In- and Out-of-the-Money Options.

Matching Strategy with Forecast.

Collar Strategy.

Delta-Neutral Hedge.


About the Authors and Contributors.