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Foreign Exchange

FX news: CME launches volatility contracts

We all missed a trick. Did you realise it was possible to patent volatility? Nor did I, but apparently it was done 10 years ago.

Back in February 2000, Robert Krause filed a patent for a “computer implemented method for the creation and trading of financial instruments based upon the volatility of an underlying...” and called it a ‘volatility contract’.

Krause is an options veteran – he has been at Zurich Capital Markets, Mitsui Commodities, Morgan Stanley and the CME (Chicago Mercantile Exchange) – so he knows his options onions. He also knows a bit about patent law: the patent was granted (US patent no. 7,328,184 B1) and the CME has now licensed the product from Krause’s company The Volatility Exchange (VolX).

In the first quarter of 2011, CME will begin offering a set of realized or historical volatility futures. The FX VolContracts will be cash-settled to either a one- or three-month historical volatility, calculated by reference to daily price movements in major CME currency futures. “The FX VolContracts will be the first futures contracts that offer direct trading of foreign exchange volatility. In addition, they will provide spread trading opportunities against CME’s listed FX futures and options products,” says CME.

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