Posted: 07/1999
TeleCommodities Indices Turns Forward-Looking
Beginning in next month's issue of PHONE+, RateXchange will publish new TeleCommodities Indices reflecting temporal (current and future) and geographically specific indicators, including:
* The Real-Time Bandwidth Exchange*Revealed Price Index (RTBX*RPI), which reveals current market rates for wholesale public switched telephone network (PSTN) minutes; and
* The RTBX*Revealed Forward Price-60 (RFP-60), which reveals the implicit 60 days futures prices from the observed trading activities on a specific route.
Both indices will be applied to individual U.S. outbound routes and 10 geographical composite indices using actual sales data on RateXchange's online bandwidth market center as the underlying data.
These new, patent-pending indicators are unique in that:
1. Revealed futures prices are collectively implied by contract terms (the prices and lengths of actual trades). RTBX*RFP-60 is derived using the no-temporal-arbitrage principle. If the forward prices are not properly aligned, arbitrage opportunities can be exercised to bring the forward prices back into alignment.
2. The indices will decouple transport and termination costs to more accurately reflect whether pricing trends are a result of deregulation or technology advances/new deployment.
"Telecom pricing managers must not only know where rates are today to prevent loss of revenue, they must also understand where rates are going," says Ross Mayfield, RateXchange vice president of marketing. For example, he says if a company sells a three-month contract for 250,000 minutes per month for countrywide termination to Japan on day 50 when the RPI is at 16.8 cents per minute, and the RFP-90 for Japan is at 16 cents, the best estimate for the price for minutes in the first month will be around 16.8 cents. It will be around 16 cents for the third month, and somewhere in between for the second month (see figure below.)
Image: Japan Revealed Index Price
Armed with such market information, carriers can engage in intelligent forward-looking pricing that may be attractive to buyers. Carriers can price capacity at approximately 16.5 cents per minute for the duration of the three-month contract and realize significant returns.
"These indices can become the fundamental building blocks of the futures-options- derivatives market for the telecommunications industry," Mayfield says. He adds that he expects these new indices to contribute to the efficient operation of this emerging market by providing market signals to the participants (both buyers and sellers) and by disseminating timely market information to reveal the collective beliefs on prices (both current and future) as implied by the terms (price and duration) of completed trades.
"Rushing into trading futures to hedge risks without the right market information would actually increase carrier risks. The time for financial trading in the telecommunications industry will come, and will come soon," Mayfield says. "RateXchange is here to provide not just the delivery-switching mechanism, but also the financial building blocks to ensure a smooth and speedy transition to make this convergence an efficient reality."
