Christopher J. Neely

English

Research Papers in Economics

Options on Economic Data
On October 1, 2002, Goldman Sachs and Deutsche
Bank began auctioning options on economic news
releases. The first auction was for options on the
September U.S. nonfarm payrolls report, released
October 4, while later contracts will include U.S. retail
sales, gross domestic product, measures of consumer
confidence, inflation, and German data. 
A call (put) option confers the right, but not the
obligation, to buy (sell) an asset at a given time in the
future for a given price, called the strike price or exer-
cise price. For instance, a call option with strike price
of 100 on September nonfarm payroll growth garners
$1 per thousand jobs created in excess of 100,000.
That is, if nonfarm payroll growth is announced to be
135,000, the buyer of such a call would receive $35
for each unit purchased. If the September nonfarm
payroll change is less than 100,000, the buyer of the
call option receives nothing and loses the initial invest-
ment. (Only the initial announcement determines the
payoff.) Therefore the potential loss in buying an option
is limited to the price of the option, but the potential
payoff is much greater. 
Goldman Sachs and Deutsche Bank match buyers
and sellers with a double Dutch auction in which prices
are determined by the lowest successful bid and all
winning bidders pay the same price for the option.
Higher bidders, however, have first claim on larger
quantities of the option.
The seller of the option is obligated to pay the buyer
if the option ends up ￿in-the-money￿￿having a positive
payout. For regulatory reasons and to reduce the risk
that options sellers might default on their obligation to
the buyers, only institutional investors and hedge funds
may participate in the auctions and Goldman Sachs
and/or Deutsche Bank will be the official counterparties
to the buyers. 
What economic good do these options on economic
statistics provide? They permit firms and individuals
to hedge risk, to reduce the danger that bad (or good)
economic statistics will reduce their profit/wealth. For
example, a construction firm might buy a put option
on housing starts to hedge its risk against a slowdown
in the industry. If announced housing starts are less than
the ￿strike price￿ of the firm￿s put option, the firm will
receive a payment that will make up for the reduced
revenue that accompanies fewer housing starts. Simi-
larly, a cruise line might hedge itself against a down-
turn in travel by using options on consumer confidence. 
These options not only allow firms and individuals
to share the risk of uncertain economic outcomes, they
also provide publicly available information about the
likelihood of these outcomes. In other words, the
options prices could help forecast the distribution of
the economic statistics. For example, the difference
between the prices of call options on September payroll
growth with strike prices of 100 and 120 might be used
to predict how likely it is that employment growth
will be between 100,000 and 120,000. Because such
forecasts are generated by firms ￿putting their money
where their mouth is,￿ they might be more accurate
than free forecasts. If this market succeeds, such implied
forecasts might help both private decisionmakers and
policymakers. A Goldman Sachs press release reports
that the October 1 auction implicitly predicted a drop
of 38,000 in the September nonfarm payrolls. The
October 3 auction predicted a drop of 18,000 jobs. In
fact, the actual decline was 43,000. Thus, both predic-
tions from the options market bested the consensus
forecast of +20,000 published on September 30 in the
Wall Street Journal. Only time will tell if such good
predictions from the economic derivatives market are
the exception or the rule. 
￿Christopher J. Neely
November 2002
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
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Options on economic data

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Options on economic data

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