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Chart 23: Steep put skew in FXB, the ETF underlying GBP, favors buying downside protection via cheap put spreads against the odds of a hung parliament outcome in the UK general election The UK general election is scheduled to take place on Thu, 8- 50% 4% Jun-17. When the election was called on 18-April, the polls 45% pointed to a landslide victory for the Conservative Party. This 40% 3% boosted the Uk’s currency as investors assumed that such an ie} a outcome would lead to a “smoother” Brexit. Indeed, on that day 75% 2% the Sterling (GBPUSD) recorded its third best daily performance 20% over the past 8 years. 15% 49 10% ° However, while official polls still suggest an outright majority 5% ; for the Conservative Party, the odds of a hung parliament have om © © 0 Oo oO oO One ee NED O% increased in recent weeks. As a consequence the boost in the ¢5>p a4 ¢ & € Be ES currency after the election was called has slightly faded. With S55 53 @ 6 FS GF swwv_se es -? t ” za ru 2 2 significant further downside room to its recent pre-rally lows A-B 5d MA (RHS) : a . ‘m Sterling (FXB) 95% implied vol (A) and FX markets complacent with prevailing opinion poll data, ‘1m Sterling (FXB) ATMf implied vol (B) there clearly could be a significant near-term correction in the Curent sterling if the probability of a hung parliament becomes reality. Source: BofA Merrill Lynch Global Research. Daily data from 5-Jun-16 to 6-Jun-17. Hence we favor hedging downside risk in sterling via cheap FXB put spreads to lever steep put skew (3m 95%-ATMf implied vol spread at its 1-yr 90" %-ile). Table 2: Current S&P500 volatility and correlation measures relative to the prior two year of historical daily data 1-week change Over 2-year historical period 2Jun17 26May17 Change aud Minimum 25% Median 75% = Maximum 1-month ATM implied volatility TA% 16% -0.2% 0.1% TA% 10.0% 11.8% 14.5% 31.8% 1-year ATM implied volatility 13.8% 13.9% -0.1% 2.5% 13.4% 15.4% 16.2% 17.3% 22.5% 1-week intraday realized volatility 6.2% 6.1% 0.1% 3.7% 5.2% 8.5% 10.7% 14.0% 53.7% 1-year minus 1-month term structure 6.3% 6.3% 0.0% 97 8% -12.0% 2.1% 43% 5.4% 10% 3-month 90 minus 110 skew 79% 8.7% -0.8% 47% 71% 9.5% 11.3% 11.8% 13.8% 1-year top 50 implied correlation 45 42 45.85 -0.44 6.7% 42.03 49.79 54.34 57.14 65.55 3-month top 50 realized correlation 27.15 30.72 297 24.4% 12.57 27.90 37.28 48.45 60.41 VIX 1-month ATMf implied vol 16.5% 15.9% 0.6% 20.4% 61.2% 119% 85.0% 95.2% 162.2% VIX 1-month 110 minus 90 skew 28.4% 28.5% -0.1% 96.2% 9.3% 18.6% 21.5% 23.8% 30.3% Source: BofA Merrill Lynch Global Research Bankof America Merrill Lynch Global Equity Volatility Insights | O06 June 2017 11 HOUSE_OVERSIGHT_023585