Exponential Exchange Is Enabling Access To Futures Markets For Previously Untradeable Assets With A New Set Of Financial Tools

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Below is our recent interview with Paul Fortin, Head of Index Products at Exponential Exchange:

Q: Paul, can you tell us something more about Exponential Exchange?

A: Exponential Exchange is pioneering a new set of financial tools that will enable access to futures markets for previously untradeable assets. Think about how the owner of a traditional asset, say soybeans, can manage their exposure to market volatility in that asset by entering into a futures contract that allows a third party to take on a portion, or even all of their exposure to price fluctuations. We’re essentially doing this for asset classes that have never been financialized – either because they’re new or because there hasn’t been a way to standardize and value them so they can be traded. With our solutions, market participants in industries that have never had access to futures markets can now mitigate their asset-related risk by hedging their financial exposure in a more efficient and cost-effective manner than what’s offered by existing methods of risk management. For example, our launch products are a set of used vehicle futures that can be leveraged by the automotive ecosystem to hedge for used vehicle market value volatility, in the same manner that industries like agriculture, finance and manufacturing have been able to do for a very long time.

Q: Any highlights on your recent announcement?

A: Our announcement centered around the exciting news that Solactive will be our index partner. While we leveraged modern data science methods and industry-leading used vehicle wholesale data to create an index that accurately reflects movements of used vehicle market values, Solactive will calculate this index on a weekly basis so that it can be published on the major trading and financial market platforms like Bloomberg. With more than $250 billion of investments tied to the 25,000 indices Solactive calculates and administers, they’re the kind of veteran presence that helps a new index like ours gain instant credibility with both asset holders and third-party speculators.

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Q: Can you give us more insights into your offering?

A: By the end of this week, we will release and publish a composite benchmark that accurately reflects the wholesale market price levels for used light-duty vehicles called the Exponential Used Vehicle Index. This index will be the first used vehicle benchmark ever designed to be the underlying asset for cash-settling derivative contracts such as futures, forwards, and swaps.

Q: What can we expect from your company in the next 6 months? What are your plans?

A: All new futures markets start out with a single trade, then a couple trades per day, then a few trades per day. As market participants such as hedgers and speculators better understand your product and its value, the trading volume will ideally grow to a point where there are sufficient buyers and sellers for the market to be considered liquid. Exponential is in the early stages of this market cultivation process, lining up the market participants for bilateral individual trades with the plan that in six months we will have our product listed on an established exchange so that trading volume can increase on a path to a sustainable, liquid market.

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Q: What is the best thing about your company that people might not know about?

A: Creating a first-of-its-kind futures market for a new asset class is certainly not easy. It requires a team with deep experience in multiple areas, including expertise in the industry that you are planning to serve, trading, derivatives markets, and data science. We built a team with more than 40 years of automotive finance experience to cover all of the required domains. We have two PhD data scientists designing our indices, a COO (also a PhD) that has successfully co-founded two derivatives exchanges for new asset classes (carbon futures and a LIBOR alternative), and a CEO that has experience in all of the mentioned areas. In addition, we are supported by world-class advisors with experience in index development, market design, automotive finance, capital markets, compliance, and commodity exchange design and management. It’s the very definition of combining a myriad of disparate things that currently exist to create something totally new.