Underlying each 5-year agency option will be one CME 5-year agency futures contract. Similarly, one 10-year agency futures contract will underlie each 10-year agency option. Options will expire quarterly and exercise American-style.
CME agency options may be used for a variety of strategies including: the construction of hedges for Fannie Mae Benchmark NoteSM and Freddie Mac Reference NoteSM portfolios with minimal basis risk; lengthening or shortening the duration of cash agency note portfolios by selling or purchasing calls and puts on CME agency note futures; creating synthetic futures positions via combinations of calls and puts on agency note futures or traders can take a view on the shape of the agency yield curve or implied volatility differentials via trades between the options on 5-year and 10-year agency notes. In addition, spreads between CME Eurodollar options and Mid-Curve Eurodollar options against options on the 5-year and 10-year CME agency note futures will enable traders to take advantage of an outlook on their respective yield curves or implied volatilities.
CME agency futures have a strong price correlation with CME Eurodollar futures, the world's most actively traded short-term interest rate product. Eurodollar futures, which can be traded in "Packs" as well as 5- and 10-year "Bundles," have underlying yield curves that correspond closely to those of the agency notes.
Trading hours for agency options, paralleling those for futures, will be 7:20 a.m. (Central time) to 2 p.m. on the trading floor, and 2:10 p.m. (5:30 p.m. on Sundays) until 7:05 a.m. on the GLOBEX®2 electronic trading system.
The CME's 5- and 10-year agency note futures and options contracts are sized at $100,000 and listed with quarterly expirations. Contracts are settled through physical delivery of securities of either Fannie Mae Benchmark Notes or Freddie Mac Reference Notes, without differential. Notes of both agencies are AAA-rated.
The CME was the first exchange to launch agency note futures to meet the burgeoning market for non-callable securities issued by Fannie Mae® (formerly the Federal National Mortgage Association) and Freddie Mac® (formerly the Federal Home Loan Mortgage Corporation), the nation's largest home lending agencies.
