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Volatility in Asia Own NKY calendar call going into the uncertainty Sep BO) Trade update: Closing the NKY Aug/Sep put calendar trade opened on 25-Jul The short NKY Aug16 15500 put vs. long NKY Sep16 15500-14500 put spread trade was opened on 25-Jul at 0.24% premium and was closed at 0.28% premium on 8-Aug as we are approaching the Aug16 expiry. In addition, the Sep-16 NKY put spread has already carried well by selling the inflated BO) risk premium even with the spot being largely unchanged. NKY & USDJPY 1Mth vols are down to YTD low: Pricing in a slow summer With the Japanese government announcing a ¥28.1tn fiscal stimulus package last week, the Abe administration has laid out both its new monetary and fiscal policies. In the short-term, there are few catalysts and both NKY and USDJPY 1Mth implied volatilities have retraced materially. VNKY is at 21.5 and USDJPY 1M ATM vol is at 9.8%, near their YTD low levels. USDJPY 2M-1M term structure at its steepest & NKY’s in its 98" %-ile since ‘11 FX has been the main driver in the current Macro world. Chart 29 shows that the USDJPY 2-month minus 1-month term structure is at its highs since 2011. The Sep BO) meeting is expected to be held on 21-Sep so USDJPY 1-month options do not cover the event. Notably, the NKY term structure is also very steep at 1.5%, which is in its 98" percentile since 2011. The NKY term structure was at its steep at 2.5% in Dec-13. Chart 28: Japanese equity volatility has dropped to YTD lows; USDJPY Chart 29: USDJPY 2M-1M ATM term structure (1.7%) is at its 5-year high short-dated vol also retraced to near YTD low levels while the NKY 2M-1M term structure (1.5%) is at its 98" percentile 55% 17% 2% ge gar ea a aan cg 50% 16% . 15% 1% 40% 13% 0% 9 12% 35% 1 4 1% 30% mee On 2% 25% 9% “en 20% 8% 3% Ss FS 253% 2 SSSSSPSTSS SSS SIS S VNKY USDJPY 1M ATM vol (RHS) USDJPY 2Mth Minus 1Mth ATM Vol == == Current Level (1.7%) Source: BofA Merrill Lynch Global Research. Daily data from 5-Jan-16 to 5-Aug-16 Source: BofA Merrill Lynch Global Research. BofAML: Bo) plans for Sep16 ‘comprehensive assessment’ create uncertainty The BO)’s decision in keeping “QE” or interest rate unchanged in July highlighted the BO|’s limits in expanding JGB purchases and digging deeper into negative interest rate territory. More importantly, the central bank announced it will conduct a comprehensive assessment of its policy at its Sep meeting. By giving guidance for the next meeting, the Bo} has inevitably focused market attention on possible changes to the monetary policy framework. Significant monetary easing, including helicopter money, cannot be ruled out, but the more likely scenario is that the Bo) makes current monetary policy, which is fixed on achieving 2% inflation target in a short period of time, more ‘flexible’. Market expectation for the Sep BO) in terms of fwd vol is the near its lows YTD With NKY Sep ATM vol at 17.8% and Oct ATM at 20%, the NKY Sep-Oct ATM forward vol is at 21.8%, which is at the low end of the trading range going into BO) events this year (Chart 30}. We think there is value in owning forward vol via calendar options. Bankof America Merrill Lynch Global Equity Volatility Insights |O9 August 2016 15 HOUSE_OVERSIGHT_025992