CME Equity Products
CME E-mini NASDAQ
Biotechnology Futures
®
®
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Table of Contents
PAGE
ABOUT CME E-MINI NASDAQ BIOTECHNOLOGY FUTURES
2
WHY TRADE CME E-MINI NASDAQ BIOTECHNOLOGY FUTURES?
3
ABOUT THE UNDERLYING INDEX
4
TRADING CME E-MINI NASDAQ BIOTECHNOLOGY FUTURES
7
Contract Specifications
7
Trading Example I
8
Trading Example II
9
Comparing CME E-mini NASDAQ Biotechnology
Futures to Other Biotechnology Investments
10
GETTING STARTED IN CME E-MINI NASDAQ BIOTECHNOLOGY FUTURES
11
CME EQUITY PRODUCT LISTING
12
CME E-mini NASDAQ Biotechnology Futures
1
About CME E-mini NASDAQ Biotechnology Futures
To provide new trading opportunities and help investors
New pharmaceutical drugs and other products that can
manage biotech risk, CME is introducing CME E-mini
NASDAQ Biotechnology futures. Based on the NASDAQ
Biotechnology Index, this new product enables portfolio
managers and traders to gain exposure to leading
biotechnology names – such as Amgen, Genzyme, Gilead
Sciences and Biogen – all with a single transaction.
improve the quality of human life and extend longevity
have attracted a huge infusion of capital to biotech issues.
Determining the best-positioned companies in which to
invest – those that can overcome regulatory hurdles and
have the expertise, research and development capabilities
and marketing savvy to get a blockbuster drug or
innovative product to market in a timely manner – is not
that simple, and can be risky. To help investors benchmark
performance in the biotech sector, several indexes have
been created to measure the performance of a cross
section of companies in the industry. The one most
frequently quoted is the NASDAQ Biotechnology Index.
Money managers, traders and other investors have long
focused on the major stock indexes in the U.S., such as
the S&P 500, the Russell 1000, and the Russell 2000.
More recently, sector investing has attracted the growing
attention of investors large and small. The biotechnology
sector in particular is gaining increasing attention.
CME E-mini NASDAQ Biotechnology futures offer investors
a way to transfer risk related to the biotech sector as well
as a number of other potential benefits.
2
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Why Trade CME E-mini NASDAQ Biotechnology Futures?
Consider the potential benefits of trading CME E-mini
Electronic Access/Ease of Trading
NASDAQ Biotechnology futures for a portfolio:
CME E-mini NASDAQ Biotechnology futures trade on the
CME Globex electronic trading platform virtually around
the clock. Customers can access the CME Globex trading
platform through 740 direct connections in 27 countries
around the world, as well as through telecommunications
hubs – in London, Amsterdam, Dublin, Frankfurt,
Gibraltar, Milan, Paris and Singapore – that provide
reduced connectivity costs, increased accessibility, and
fast, efficient trading of CME products.
Sector Exposure
Using CME E-mini NASDAQ Biotechnology futures, traders
gain exposure to the entire biotech sector with one simple
transaction. Concerns about event risk, drug recalls, or
regulatory approvals are greatly minimized.
Trading Opportunities
As with all CME index futures contracts, CME E-mini
NASDAQ Biotechnology futures tend to closely track the
price movements of the underlying cash index, providing
risk management and investing opportunities for financial
professionals and individual investors. They also offer a
variety of trading opportunities, including outright long or
short positions, spreading against other indexes, hedging
strategies, arbitrage, and cash equitization strategies.
Cost Efficiency
Market Integrity/Fully Integrated Clearing
At CME, we operate our own clearing house that matches
and settles all trades and guarantees the creditworthiness
of every transaction that takes place in our markets.
Our integrated clearing function ensures the safety and
soundness of our markets and helps differentiate us
from our competitors. With CME Clearing serving as the
counterparty to every trade, credit risk is virtually eliminated.
CME E-mini NASDAQ Biotechnology futures require only
a small, upfront performance bond deposit – far less than
what would be required to amass a portfolio duplicating
the approximately 160 issues in the underlying index.
In addition, one of the great advantages of CME index
futures is their low transaction costs relative to buying
each stock in the index.
CME E-mini NASDAQ Biotechnology Futures
3
About the Underlying Index
CME E-mini NASDAQ Biotechnology Index futures
contracts are based on the NASDAQ Biotechnology
Index, which was introduced in 1993 and now includes
approximately 160 issues (components). The NASDAQ
Biotechnology Index is modified and capitalizationweighted. The price and the number of shares outstanding
assist in determining market value. The securities in the
NASDAQ Biotechnology Index are evaluated semi-annually;
those that fail to maintain specific criteria are dropped.
The criteria for inclusion in the Index are as follows:
» The U.S. securities listing must be exclusively on The
NASDAQ Stock Market (unless listing on other U.S.
market was prior to January 1, 2004).
A complete listing of securities listed in the Index is
available on the NASDAQ web site at www.nasdaq.com.
Many quote vendors with analytic capability also offer
the complete list with each issue.
Top Names and Weights in the NASDAQ
Biotechnology Index
Weighting
» The issuer must be classified according to the FTSE
Global Industry Classification System as either
biotechnology or pharmaceutical.
Rank
Ticker
Name
in Index
1
AMGN
Amgen
19.6%
2
GILD
Gilead Sciences
4.2%
» The issuer cannot be involved in bankruptcy
proceedings.
3
GENZ
Genzyme
3.9%
4
BIIB
Biogen Idec
3.4%
» The market cap of the issuer must be at least
$200 million, with an average daily volume of
100,000 shares.
5
TEVA
Teva Pharmaceutical
Industries
3.3%
6
CELG
Celgene
2.1%
» A security must have been trading on NASDAQ or
another recognized market for at least six months;
in the case of spin-offs, the operating history of the
spin-off will be considered.
7
KOSP
Kos Pharmaceuticals
1.8%
8
SEPR
Sepracor
1.7%
9
MEDI
Medimmune
1.6%
10
CHIR
Chiron
1.5%
The Index is sub-classified according to industry. Currently,
the four largest industries are:
1 Medical/Biomedical/Genomic Companies
49%
2 Therapeutics
22%
3 Medical-Drugs
16%
4 Medical-Generic Drugs
4
The largest holdings in the NASDAQ Biotechnology Index
include many companies in the biotechnology sector that
are on their way to becoming household names, and are
on the leading edge of drug and gene therapies and
medical breakthroughs. The chart below shows a snapshot
of top companies in the Index.
As of August 19, 2005
7%
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Correlation of Underlying NASDAQ Biotechnology Index to Other Major Indexes
NASDAQ
Biotechnology
Cash Index (NBI)
NASDAQ-100
Cash Index
(NDX)
S&P 500
Cash Index
(SPX)
Russell 2000
Cash Index
(RTY)
January-June 2005
NBI
1
NDX
.6927
1
SPX
.7008
.8772
1
RTY
.7139
.8003
.8978
1
Calendar Year 2004
NBI
1
NDX
.7559
1
SPX
.7836
.8752
1
RTY
.8317
.8588
.8758
1
Calendar Year 2003
NBI
1
NDX
.7377
1
SPX
.7139
.9046
1
RTY
.7951
.8613
.8538
CME E-mini NASDAQ Biotechnology Futures
1
5
Because of the nature and risks in the biotechnology sector, volatilities in the NASDAQ Biotechnology Index have been
significantly higher than in the S&P 500 Index or the NASDAQ-100 Index. But with increasing volatility comes increased
profit opportunities (as well as increased risk). Below is a comparison of the historical volatilities and price returns of the
NASDAQ Biotechnology Index compared with the S&P 500 and NASDAQ-100 Indexes.
Comparison of Indexes by Historical Volatilities and Price Returns
6
NASDAQ
Biotechnology
Cash Index
NASDAQ-100
Cash Index
S&P 500
Cash Index
Year
Volatility
Return
Volatility
Return
Volatility
Return
2003
29.55
45.75
25.59
49.12
17.04
26.38
2004
22.33
6.13
18.41
10.44
11.09
8.99
2005 6/30/05 YTD
18.50
-10.16
15.19
-7.87
10.76
-1.70
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Trading CME E-mini NASDAQ Biotechnology Futures
Contract Specifications
Contract Size
$50 times the CME E-mini NASDAQ Biotechnology
Index futures price
Contract Months
Two months out in the March Quarterly Cycle
Ticker Symbols
BIO
CME Globex
Trading Hours
Virtually 24-hours, 6 days a week
Minimum Price
Fluctuation (tick)
0.10 pts or $5.00
Price Limits
5%, 10%, 15%, and 20% limits
Position Limits
5,000 net long or net short
Final Settlement Date
Third Friday of the contract month
Final Settlement Price
Based on Special Opening Quotation (SOQ) of the NASDAQ Biotechnology Index
CME E-mini NASDAQ Biotechnology futures contracts move in minimal increments called “ticks.”
The tick value is .10 points, or $5.00 per contract. Thus:
» A move of one tick from 702.00 to 702.10 equals $5.00
» With this move, a long (buying position) would be credited $5.00
and a short (selling position) would be debited $5.00
» A move of one full point – from 702.00 to 703.00 – is worth $50.00
CME E-mini NASDAQ Biotechnology Futures
7
Trading Example I: Obtaining Market Exposure in the Biotechnology Sector
A trader believes that a major advance is underway in the biotech sector. He/she has a few options:
» Choose a stock, or stocks, from hundreds of biotech names
» Purchase a basket of stocks
» Go long (buy) a CME E-mini NASDAQ Biotechnology futures contract
The trader decides that futures would be the easiest and most cost-effective way to obtain exposure to this sector.
Day 1
On October 15, the trader goes long one CME E-mini NASDAQ Biotechnology futures contract for December
delivery at a price of 705.00. BIOZ is the ticker. At the end of the day, BIOZ is trading at 705.00.
There is no gain or loss at the end of day one.
Day 2
On October 16, BIOZ is trading at 710.00.
Trader has made 5.00 pts x $50.00 per point, or $250.00 per contract, on day two.
Day 3
On October 17, BIOZ is trading at 713.00.
Trader has made additional 3.00 pts x $50.00 per point, or $150.00 per contract on day three.
Day 4
On October 18, the trader closes out the position at 713.00.
Profit/Loss = Sale price – purchase price x $50.00
= 713.00 – 705.00 = 8.00 pts
= 8.00 pts x $50.00
= $400.00 total profit on trade
8
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Trading Example II: Hedging a Portfolio
A money manager has a large client with a $100 million portfolio. Five percent of the client’s holdings are in a diversified
basket of biotech firms. The manager’s research shows that the biotech sector is currently overpriced, and he/she wants to
protect this portion of the portfolio against the possibility of significant decline.
The manager‘s options are to:
» Sell the client's biotech holdings to avoid a downturn
» Sell short CME E-mini NASDAQ Biotechnology futures to hedge against a downturn
Given the huge tax implications of selling all of the biotech issues, as well as the costs and slippage, the manager opts to
sell short CME E-mini NASDAQ Biotechnology futures as a simple way to hedge the downside and leave the portfolio
intact and immune to taxes, costs, and slippage.
Portfolio size:
$100,000,000
Value of biotech holdings:
$
Number of CME E-mini NASDAQ
Biotechnology futures required:
= $5,000,000/notional value of futures
Notional value of futures:
= Price x $50.00
5,000,000
= 700.00 x $50.00
= $35,000
Number of futures contracts
= $5,000,000/$35,000
= 143 contracts
In this example, the number of CME E-mini NASDAQ Biotechnology futures required to hedge the exposure in the portfolio
is approximately 143 contracts. If the sector heads lower, the loss in the portfolio would likely be offset by gains on the
short futures contracts. However, the risk would be on the upside. If the sector advanced significantly, the client’s holdings
would advance but the gains would be offset by losses on the hedge. Therefore, when using futures as a hedge, the
manager/trader would have to manage the risks inherent in such a strategy and would lift the hedge in the event that the
biotech sector advanced too much.
CME E-mini NASDAQ Biotechnology Futures
9
Comparing CME E-mini NASDAQ Biotechnology Futures to Other Biotechnology Investments
In recent years, a number of products have been introduced that allow one to trade the biotechnology sector. However,
futures usually have distinct advantages for traders. A comparison of the major products, including CME E-mini NASDAQ
Biotechnology futures, follows.
Comparison of Biotechnology Investments
CME E-mini NASDAQ
Biotechnology Futures
NASDAQ
Biotechnology ETF
Biotech
HOLDRs
Type of Investment
Futures
ETF Open End
Mutual Fund
Grantor Trust
Number of Issues in Underlying*
157
157
18
24-hour Availability
Yes
No
No
Trading Platform
Electronic
Electronic/floor
Electronic/floor
Management Fee
n/a
50 bps
$8.00 per
100 shrs
Regulated By
CFTC
SEC
SEC
Top Five Holdings
n/a
Amgen
Gilead
Genzyme
Teva
Biogen
Genentech
Amgen
Gilead
Biogen
Genzyme
Please note: These examples do not include transaction fees (brokerage fees and other fees) which would need to be part of the complete
analysis of hedging equity price risk.
*As of June 30, 2005.
10
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Getting Started in CME E-mini NASDAQ Biotechnology Futures
For additional information to help you get started trading CME E-mini NASDAQ Biotechnology futures, please visit our Web
site at www.cme.com/equities. You will be able to access a number of brochures and online seminars as well as marketing
and education materials that can answer your questions or help you to begin trading these and other CME equity futures
and options on futures products. Additionally, if you would like to talk to a CME representative, please call our Customer
Service Line at 1-800-331-3332 or contact your broker.
CME Publications
» CME Equity Index Futures and Options Informational Guide
» CME E-mini Stock Index Futures and Options Brochure
Web Sites:
» CME Web sites: www.cme.com/equities and www.cme.com/eminis
» NASDAQ Web sites: www.nasdaqtrader.com and www.nasdaq.com
CME E-mini NASDAQ Biotechnology Futures
11
CME Equity Product Listing
CME offers a complete range of futures and options products based on a variety of different indexes, including:
» CME NASDAQ-100
» CME S&P 500
» CME E-mini NASDAQ-100
» CME E-mini S&P 500
» CME E-mini NASDAQ Composite
» CME S&P MidCap 400
» CME E-mini NASDAQ Biotechnology
» CME E-mini S&P MidCap 400
» CME Russell 2000
» CME S&P SmallCap 600
» CME E-mini Russell 2000
» CME S&P 500/Barra Growth
» CME E-mini Russell 1000
» CME S&P 500/Barra Value
» CME Nikkei 225
» CME SPCTR Futures
» CME Futures on ETFs
» CME Goldman Sachs Commodity Index (GSCI)
» CME X-Funds
» CME GSCI Excess Return
» CME Security Futures Products (Single Stock Futures)
12
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract's
value is required to trade, it is possible to lose more than the amount of money initially deposited for a futures position. Therefore, traders should only use funds
that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because a trader cannot
expect to profit on every trade.
All references to options in this brochure refer to options on futures.
“Standard & Poor’s®”, “S&P®”, “S&P 500®”, “Standard & Poor’s 500®”, “Standard & Poor’s Depositary Receipts®”, “S&P SmallCap 600®”, “S&P MidCap 400®”,
“S&P Barra Growth®”, and “S&P Barra Value®” are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by PDR Services LLC and the
American Stock Exchange LLC in connection with the listing and trading of SPDRs, on the Amex. These products are not sponsored, sold or endorsed by S&P, a
division of The McGraw-Hill Companies, Inc., and S&P makes no representation regarding the advisability of investing in them. iShares® is a service mark of Barclays
Global Investors. The Russell 1000® Index, Russell 2000® Index and iShares Russell 2000 Index Fund™ are registered trademarks of Frank Russell Company. Frank
Russell Company assumes no liability in connection with the trading of any contract based on the Russell 1000 or Russell 2000 Indexes. NASDAQ®, NASDAQ
Biotechnology Index®, NASDAQ Biotechnology®, NASDAQ-100 Index®, NASDAQ-100®, NASDAQ Composite®, NASDAQ Composite Index® and NASDAQ-100 Index
Tracking StockSM are trademarks of The NASDAQ Stock Market, Inc. (which with its affiliates are the Corporations) and are licensed for use by CME. The CME E-mini
NASDAQ Biotechnology futures have not been passed on by the Corporations as to their legality or suitability. CME E-mini NASDAQ Biotechnology futures are not
issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO CME
E-MINI NASDAQ BIOTECHNOLOGY FUTURES. Nikkei and Nikkei 225 are trademarks of Nihon Keizai Shimbun Inc. and have been licensed for use by CME in
connection with the trading of Futures and Futures Options (Products) based on the Nikkei Stock Average (Nikkei 225). The Nikkei Stock Average or Nikkei 225, as it
is called sometimes, is owned by and the property of Nihon Keizai Shimbun Inc. The products are not issued, endorsed, sold or promoted by Nihon Keizai Shimbun
Inc. or its subsidiaries. NIHON KEIZAI SHIMBUN INC. AND ITS SUBSIDIARIES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO SUCH PRODUCTS.
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CME. All other trademarks are the property of their respective owners. The information within this brochure has been compiled by CME for general purposes only.
CME assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only,
and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject
to and are superseded by official CME rules. Current CME rules should be consulted in all cases concerning contract specifications.
Copyright © 2005 CME. All rights reserved.
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