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Eastern Europe's Vienna Hedge

ÖTOB's new family of Eastern European index products may make foreign investment more attractive.

By Margaret Elliott

When the Berlin Wall fell, pundits said that the former German capital city would soon become the new gateway to Eastern Europe. The pundits were wrong.

Berlin and the new Germany are fully occupied with that country's own internal difficulties: soaring unemployment and European Monetary Union. Germany, it turns out, is more Western Europe than Eastern.

The baton has passed to Vienna, more centrally located certainly, but also a more historically appropriate jumping-off point for investors into Poland, Hungary, the Czech Republic and Slovenia. Stocks from these countries are already traded on the Austrian Stock Exchange, and now, thanks to a comprehensive effort by the stock exchange's derivatives arm, ÖTOB, index products are now being rolled out.

Denominated in dollars, this new family of futures and options is designed to extend the ability of foreign investors to hedge their investments in these volatile markets. Though the returns from these markets range from 124 percent last year for Hungary to 13 percent for Slovenia, the risks are also great: historic volatility in Hungary can reach 50 percent. Thus any hedging products are welcome.

ÖTOB identified the need after watching the growing demand for over-the-counter hedges on the stocks and indices of the four countries. For at least four years, Austrian banks have been providing such products on demand; ÖTOB created the Central European Clearing House & Exchange (CECE) index in July 1996. "ÖTOB's new products simply make formal what we've been doing informally for years," says Andreas Kramer, manager of marketing for Eastern Europe products at Investment Bank Austria, one of the market-makers in the new instruments.

The first products off the line in what is known as the CECE project were the futures contracts and options on the HTX, the Hungarian Traded Index, which started trading strongly on March 20. The index, which consists of 11 stocks, represents more than 10 percent of the market capitalization of the country's listed stocks. Not only are the products denominated in dollars and allow foreign investors to mitigate the foreign exchange risk, but trading is accomplished via a fully electronic system with an integrated clearinghouse.

The next products came on stream in May-similar instruments on the Czech Traded Index (CTX). The index products for Poland and the 41-stock CECE index are due by the end of the year. Five Austrian market-makers have signed on to provide liquid markets in all of the new instruments: Investment Bank Austria, Creditanstalt, RZB, GiroCredit and BAWAG.

Contract specifications will be the same for each of the four products. Contract values for the futures are $5 per index point; tick size is 10 cents, with a tick value of 5 cents. The maturities range from one, two, three and the last month of the following quarter. Trading hours are 10 a.m. to 3 p.m. Central European Time. Cash settlement is in dollars. For the European style puts and calls, all the above apply except that the settlement of premium, margin and fees is trade-date plus one.

The only new wrinkle for U.S. investors may be the acceptance of a wider range of collateral than normal. Triple-A sovereign debt of the European Union, Switzerland, the United States or Japan, plus cash in all major international currencies, will be accepted. The normal settlement will be through Cedel.

So for investors in Eastern Europe, life is getting easier. The range of investors in the area is already great. But the riskiest area is Russia and the CIS countries; the CECE countries are the established markets in the region. Thus, many of the 45 Central European funds and the 113 global emerging markets funds use this area to balance out investments in high-risk markets.

Investment Bank Austria's Kramer thinks the new products will make life a lot easier for investors with positions in these countries as well as those who were shunning the area because they may have felt the risks were just too high. Some emerging markets investors are less likely to invest in countries where the ability to hedge the investment is quite difficult. "It makes our lives easier too," he says. "We have a place to hedge as well."