CME Stock Value 50% From Energy and Interest Rates
The Chicago Mercantile Exchange ( CME ) is the first publicly traded financial exchange in the world. Historically, the company focused on agricultural products for farmers in the US which were traded in Chicago. It has transformed itself into a primarily electronic marketplace for financial futures and options which serves as risk management tools in interest rates, equities, foreign exchange, commodities and alternative investments.
CME competes with other established exchanges like NYSE Euronext ( NYX ) and Nasdaq ( NDAQ ), but it remains the largest derivatives exchange in the world. Below we look at two of the largest value drivers which are energy and interest rate contracts that account for 24% and 23% of our $323 price estimate respectively.
50% of Value From Energy and Interest Rate Products
CME offers futures and options on energy products such as crude oil, natural gas, power and other energy related exchange traded contracts. We estimate that energy contracts accounts for 24% of our price estimate for CME. CME is benefiting from the increased use of derivative contracts to hedge against market volatility witnessed in recent years. As more contracts are traded electronically on over the counter exchanges and as global markets become more interconnected, we could see the volume of contracts traded increase sharply.
We forecast the average daily volume of energy contracts traded on CME to reach 3.7 million in the coming years from its current level of 1.7 million, implying a growth rate of around 12% annually.
CME also derives 23% of its value from interest rate contracts. The company's average daily volume of interest rate contracts will get a lift from electronic trading. We forecast the daily volume of interest rate contracts to reach nearly 11 million by 2017 from its current level of about 5 million. In light of the flood of government debt to finance budget deficits from the US and Europe, demand for interest rate products that market participants use for hedging or speculation could outstrip our current forecasts.
For a variety of factors, given the global economic recovery, the increased interconnectedness and digitalization of the global financial system and the ballooning of financial markets, we could see volume of contracts increase even higher than our estimates.
A 10% increase in volumes over our estimates for energy and interest rate contracts will lead to almost 6% increase in Trefis price estimate for CME.