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A further squeeze in US and Japanese yields is most positive Japan in Asia The strong US NFP print and the large Japan fiscal plan catalysed a global selloff in bonds. Chart 31 shows that NKY is the most sensitive Asian market to rising USD & JPY yield since 2010 with a correlation of 31%. Buy 1x NKY Oct 17500 call, short 0.65x Sep 17250 call: Gamma neutral, long vol Given the low market expectation in the BO) and a potential rally in Japanese equities on the back of further yield squeeze and rising BO) expectation next month, we like owning 1x NKY Oct 17500 call vs. selling 0.65x of Sep 17250 call for 0.7% (¥116). The trade will have a positive 9% delta, 8bps of vega and flat gamma & theta initially. Indicative pricing (As of 8-Aug-16, Ref: 16650) Buy 1x NKY Oct 17500 call: 1.13% (¥187) (iv: 19.2, delta: 24%, gamma: 3.8%} Sell 0.65x NKY Sep 17250 call: 0.66% (¥110)} (iv: 16.9, delta: 23%, gamma: 5.9%) Net: 0.70% (¥116) (delta: +9, vega: 0.08%) Chart 30: Current NKY Sep-Oct ATM volatility is cheap relatively to Chart 31: The Nikkei is the most sensitive to rising USD and JPY rates implied volatility going into previous BO) meetings in 2016 among Asian indices 9 — a 40% ka — ach baa i oe) Correlation of Index vs. 10Yr USD & JPY Rates 3, 40, a= Jul16BOU Current SepOct Vol 30% nS 2 Ps 16.5% 17.0% 17.2% 20% 35% 10% 30% 0% 29% -1.7% Front Month ATM Vol before BOJ “10% 65% NIFTY KOSPI2 HSCEl TWSE HSI AS51 NKY 20% -16 -15 -14 -13 -12-11-10 -9 -8 -7 6 -5 4 -3 -2 -1 ; ™ Correlation of Index vs. 10Yr USD & JPY Rates Number of Trading Days before BOJ Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research. Weekly correlation since 2010 Chart 32: Mark-to-Market of the long 1x NKY Oct 17500 call, short NKY Sep 17250 call structure 400 300 200 100 Mark-to-Market in Yen oo o eo eo co coc co eo coo oe oo ooo eo ooo eo eo ooo oOlCUcOlCUcUUOCUCUCUOCOOCUCcCOCUCUhCOCUCcUCOUCOCUCOC OS qgqQoeo eo ooo covclUcmmcmchOlCUCUCOOCUCOCOC RO CO SB eo eo ee CoO oO ReOCUc OCU hmUCUCUOWOCUCUCOCOCOCcChCOCUCcUhCOOCUCOCTOC OC CO RB BO OO eS N O hs © MD N hs © DD © om oD Bh © Q IDLO lO WO 1D 1D 1 lO LO I CO C—O (0 0 OO Oe EO HO Ol OOOO OOH OH OH DO CO DD Buy NKY Oct 17500C, Short 0.65x Sep 17250 (At Inception) Buy NKY Oct 17500C, Short Qo 65x Sep 17250C (1day Before Sep expiry) Source: BofA Merrill Lynch Global Research Assume volatility stays constant ig docs Bankof America 16 Global Equity Volatility Insights | O09 August 2016 Merrill Lynch HOUSE_OVERSIGHT_025993