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Abstract
On May 9, 1991, the London Futures and Options Exchange (FOX) introduced four property futures contracts to make possible the development of facilities for hedging, arbitrage, and price discovery in the commercial and residential markets. Two contracts were based on the Nationwide Anglia Building Society house price (NAHP) index and the FOX mortgage interest rate (MIR) index. Trading in the contracts was suspended in October 1991, partly because they failed to gain economically viable trading volume.
To identify reasons for the failure, this article analyzes the opportunities and difficulties of using such contracts. The main findings are that (1) owing to lag dependence in the NAHP index, the futures contract did not provide the economic benefit from hedging market risk that stock index contracts provide and (2) potential arbitrageurs and speculators were deterred from using the MIR index contract because of high transaction costs and long time lags involved in processing new mortgage loans.