Académique Documents
Professionnel Documents
Culture Documents
Europe
Market Commentary
Derivatives Strategy
Raymond Hing
+ 44 20 7888 7247
Key Points
!
21 December 2009
SPX
MSCI Emerging
SPX Implied Vol (inverted)
140
3.5
Commodities
BAA - AAA Spread (rhs)
120
100
2.5
80
60
1.5
40
18/01/08
1
11/04/08
04/07/08
26/09/08
19/12/08
13/03/09
05/06/09
28/08/09
20/11/09
Derivatives Strategy
Since the market collapse in 2008, quantitative easing and low base rates (in particular in the US,
see Exhibit 3) have fuelled the strong economic rebound, of which risk appetite and the global
market rally is a consequence. Since September 2009 however, economic momentum has
slowed, leaving the dollar as the main driver of financial markets. Correlation staged one last,
spectacular jump from 20% to almost 60% as opportunistic buy on dip strategies resulted in
strong dollar offering at times of market rebound. Has the weak dollar been the only force
sustaining financial markets when consensus thought that a mild correction was overdue?
Exhibit 2: Avg Correl of $ to SPX, Credit, Commos and Vol
80
60
BBUSD3M
BBGBP3M
40
BBJPY3M
BBEUR3M
20
BBCHF3M
0
01/07/99
-20
28/12/00
27/06/02
25/12/03
23/06/05
21/12/06
19/06/08
3
2
-40
1
0
23/11/06
-60
23/05/07
23/11/07
23/05/08
23/11/08
23/05/09
23/11/09
Derivatives Strategy
The impact of the 2009 rally on valuations was strongly felt on two asset classes which in late
2008/early 2009 suffered the bulk of the selling pressure: convertible bonds and dividends (see
our previous reports on dividends dated 16 February and 14 October 2009, and on convertibles
on 1 December 2008). Immediately after risky assets touched a low in March, Dividends and
Convertibles rallied spectacularly. The trade-off of dividends against Equity (as proxied by the
implicit risk premium of the index level versus dividend futures) fully recovered in just a few weeks
leaving us undecided as to whether going long Equity or Dividends (Exhibit 6 however note that
we have a long preference for 2011 dividends as explained in our report Lower risk reward for
dividends, dated 14 October 2009).
Similarly, convertibles yield advantage (the difference between the convertibles yield and its
underlying Equity for convertibles trading at a high delta) has collapsed from 550bps in early April
to roughly 250bps today (Exhibit 7).
One illustration of the lack of cheap instruments over the last months: based on Credit Suisse
Prime Services data, Relative Value hedge funds (which typically try to create low volatility returns
from the mispricing of different asset classes) had to increase their leverage from 4.0x in June
(close to levels prevailing in December 2008) to over 6x today in order to preserve absolute
returns.
Exhibit 6: SX5E dividend future implied risk premium
9
500
400
6
5
300
200
3
2
100
1
0
04/01/05
04/10/05
04/07/06
04/04/07
04/01/08
04/10/08
04/07/09
0
14/04/09
28/05/09
13/07/09
31/08/09
16/10/09
08/12/09
A market in waiting
Exhibit 8: Hedge fund long bias
Fair or expensive risky asset prices (or the perception of it) could explain why financial markets
have been showing signs of exhaustion over the last few months now that the most striking long
opportunities have faded. The SX5E index has been stuck between 2,700 and 2,950, a 10%
range, since 21 August. The probability of such a range is less than 30%.
The first phase of the rally was mostly driven by fast money: as shown on Exhibit 8 hedge funds
were fast in increasing their long exposure on strong valuation signals in March but have been
less active since Summer.
Traditional investors who have missed the initial phase of the rally (and we believe that most of
them have) are now left with disappointing risk rewards compared to only a few months ago. With
the brutality of the recession still present in investors minds it is no surprise that trading volumes
are below volumes observed in the last recoveries (Exhibit 9 next page) and that traditional
investors Equity allocation is still at depressed levels (Exhibit 10). The market is waiting for a
confirmation of the economic recovery (what we call Phase 2 in the remainder of the report)
before getting involved.
Derivatives Strategy
Exhibit 9: SPX daily volume now vs 2003 Exhibit 10: US Insurance Equity holdings (%)
Derivatives Strategy
Exhibit 13: Consensus 12 mth forward EPS
Last, Andrew Garthwaite believes we could re-enter a bear market in late 2010 if a government
bond funding crisis unfolds; in particular, the UK has the highest probability of a government debt
crisis in the G7, which could potentially force an expansion of quantitative easing programs and
lead to currency crisis.
Within Continental Europe Germany looks particularly attractive. Its recovery has been stronger
than the rest of Europe, aided, in particular, by its large manufacturing and capital goods
exposure. As the worlds second-biggest exporter after China, it is particularly leveraged into the
rebound in global trade and gets additional benefits from a low leverage: it has a structural primary
budget surplus, a household savings ratio of 11% and consumers are net floating-rate creditors.
Derivatives Strategy
As a result, Germany is the European market most resilient to rises in rates/bond yields. On
valuation, Germanys forward P/E relative to Europe is 11% below average.
Exhibit 17: Indicative Dec10 ATM This leads to our first derivatives trade idea for 2010: go long SX5E or DAX outperformance
options versus the SPX, FTSE or Nikkei which are all rated a benchmark or underweight by
outperformance option prices
Andrew Garthwaite. Indicative prices are shown on Exhibit 17. Outperformance options are an
Long/Short Offer
OTC derivative that pays the outperformance of a given index versus another, if positive.
SX5E/FTSE
5.10%
Outperformance options are therefore long volatility (a high volatility increases the likelihood of a
SX5E/SPX
4.90%
positive payout) and short correlation (a strong correlation reduces the likelihood of a major
SX5E/N225
5.10%
difference in the underlyings performance). Outperformance options currently enjoy superior
Source: Credit Suisse Derivatives Strategy
pricing due to a low implied volatility and high implied correlation environment and it may be an
interesting tactical moment to enter such trades (see page 15).
A strong rise in US retail sales breaking out of the 2% range that has been prevalent for a year
now may suggest that Phase II is coming closer. Before thats fully apparent, however, ISM
New Orders are likely to trend lower, leaving markets in the difficult interim between Phase I and
Phase II of recovery for some time.
Derivatives Strategy
100
2003
90
90
2009
2003
80
2008
80
70
60
70
50
60
40
50
40
20/11/08
30
20/02/09
20/05/09
20/08/09
20/11/09
20
12/03/09
12/06/09
12/09/09
12/12/09
However the quick fall in Equity implied and realized volatility should be understood in the light of
the unique levels of market stress reached at the peak of the crisis in 2008, and the non-less
spectacular healing observed in the early months of 2009. This was evident in the large scale
return of the real money buyer for credit instruments and the lower haircuts on riskier credit
instruments in the repo market.
One measurable indicator is the return of funding liquidity, as seen in the normalisation of Ted
spread and the Libor OIS differential (Exhibit 22). We are now in a situation where traditional
drivers of Equity volatility (Equity and macroeconomic factors rather than liquidity factors) have
regained their prevalence, which should keep realized volatility within bounds in 2010.
Derivatives Strategy
In a recovery scenario which should see leading indicators come back to pre-crisis levels, the SPX
index increase by 10% over the next 6-months, the BAA/AAA credit spread fall down to its
average level of 2.3% since 1991 and upwards revisions rise to 200, the SPX realized volatility
may fall to as low as 14%. However, imn our favourite scenario of an incomplete recovery, in
particular where Equity returns would be flat and credit would stay unchanged, the realized
volatility over the next 6 months may actually rise to 24%. It may rise to 32% in a double-dip
scenario - not to mention the risk of another Equity crisis which is addressed later in this outlook.
Given the low probability of the full recovery scenario we believe that the risk to realized volatility is
actually to the upside, in particular for the beginning of the year with a less supportive macro
background and, according to our US colleague Ed Tom, the risk of an active US political agenda
in banking, healthcare or industrials.
Exhibit 23: SPX 6M realised volatility model
70%
Scenario
60%
SPX 6M change
Leading Indicators
Credit
Upwards Revisions
Realised Volatility
50%
6M Realised Vol
40%
Fitted
30%
Current
198
96.25
2.9
191
22.7
Recovery
100
100
2.3
203
14.1
Incomplete
Double Dip
recovery
0
-200
95
90
3
4
150
100
23.7
31.9
20%
10%
0%
21/06/91
17/12/93
14/06/96
11/12/98
08/06/01
05/12/03
02/06/06
28/11/08
Using the same factors, and dropping in realized volatility, we also built a linear model for the SPX
implied volatility with an r-squared of 86% (Exhibit 25). According to this model, implied volatility
is currently fairly priced around 24%, but could increased to 30% in a mild double-dip scenario
where as the potential fall in vol from a full recovery would be 5 volatility points only.
We find that the main driver of a larger fall in implied volatilities would be credit a fall in the
credit spread to 1.5 would bring SPX volatility closer to 15%. However following the 2002/2003
credit crisis Credit spread fell back to that level only two and a half years later. Additionally,
according to Credit Suisses Credit Strategist William Porter, the percentage of companies losing
money on a yearly basis currently does not support a substantial fall in defaults, and hence not
credit spreads (however, he also note that macro profit trends do support a narrowing of spreads).
We would therefore believe that SPX implied volatility is likely to remain in the low 20s in 2010,
with potential for peaks towards 30%.
60%
Scenario
50%
SPX 6M change
Leading Indicators
Credit
Upwards Revisions
Realised Volatility
Implied Volatility
6M Implied Vol
Fitted
40%
30%
20%
10%
0%
04/09/98
02/03/01
29/08/03
24/02/06
22/08/08
Current
198
96.25
2.9
191
19%
23.7
Recovery
100
100
2.3
203
18.5
Incomplete
Double Dip
recovery
0
-200
95
95
3
4
150
100
24.3
29.3
Derivatives Strategy
FTSE
8,000,000
STOXX50E
SPX
6,000,000
4,000,000
4,000,000
2,000,000
2,000,000
0
31/12/08 11/02/09 25/03/09 06/05/09 17/06/09 29/07/09 09/09/09 21/10/09 02/12/09
FTSE
STOXX50E
SPX
0
31/12/08 11/02/09 25/03/09 06/05/09 17/06/09
-2,000,000
-2,000,000
-4,000,000
-4,000,000
45%
40%
35%
30%
However we would also note that we are less negative on selling long dated volatility than short
term. First, pricing is currently interesting, with the 2-year to 3-month implied volatility spread in
the top 25% of observations over the last 5 years. Second, banks are expected to become very
Exhibit 30: 2Y/1Y SPX forward
long volatility if the market continues to rebound, from large call spread positions or even light
variance
exotic structures such as knock-out calls having been traded by clients in search of leverage. A
strong supply of implied volatility on behalf of banks may benefit the mark-to-market of long-term
volatility exposures.
25%
20%
15%
10%
5%
0%
24/05/01 24/05/02 24/05/03 24/05/04 24/05/05 24/05/06 24/05/07 24/05/08 24/05/09
Last, some more structured products such as forward-starting variance still show interesting
pricing. Forward starting variance is an exotic derivative that will make its holder short (or long)
realized variance for a specified expiry, at a specified time in the future. As shown on Exhibit 30,
the 1-year in 1-year forward starting variance has not corrected in-line with vanilla volatilities and
still trades above the previous peak level reached in 2002.
Derivatives Strategy
9.0%
4,000,000
SPX
8.5%
3,500,000
SX5E
8.0%
3,000,000
7.5%
2,500,000
7.0%
2,000,000
6.5%
6.0%
1,500,000
5.5%
1,000,000
5.0%
500,000
4.5%
4.0%
20/12/04
20/09/05
20/06/06
20/03/07
20/12/07
20/09/08
20/06/09
FTSE
STOXX50E
SPX
0
31/12/08 11/02/09 25/03/09 06/05/09 17/06/09 29/07/09 09/09/09 21/10/09 02/12/09
-500,000
10
Derivatives Strategy
SX5E which tends to see higher risk aversion heading into year-end (see our report Higher SX5E
risk aversion in December, dated 1 December).
Exhibit 33: SX5E Dec09 call open interest
6,000,000
5,000,000
'1800
'2000
'2200
'2400
'2600
'2800
'3000
'3200
'3400
5,500,000
5,000,000
'1800
'2000
'2200
'2400
'2600
'2800
4,500,000
4,000,000
4,000,000
3,000,000
3,500,000
3,000,000
2,000,000
2,500,000
1,000,000
2,000,000
0
08/12/08
02/03/09
25/05/09
17/08/09
09/11/09
1,500,000
08/12/08
02/03/09
25/05/09
17/08/09
09/11/09
Underinvested/overhedged markets result in lower realised volatility, vol of vol and vol/equity
correlation, an environment in which short skew positions typically thrive (see our detailed analysis
Trading the Volatility Skew, dated Nov 2008). The SPX experience in November shows that
selling the skew starts being dangerous only on days when Equity markets fall by almost 3% close to 50% realized volatility when Equity indices currently realize roughly 20%.
15%
10%
5%
-25%
-20%
-15%
-10%
-5%
0%
0%
-5%
5%
10%
15%
20%
25%
-10%
-15%
-20%
-25%
For investors looking to receive leveraged exposure into a market rally, we would suggest using
risk-reversal, that is financing the purchase of a call option by selling an out-of-the-money put
option basically the same trade as Exhibit 32 but without delta-hedging. As shown on Exhibit
35, March, June and Dec10 90/110 risk reversals can all be put on at a credit, meaning that you
get paid to enter the trade, while for investors looking for more upside participation the 90/105
risk reversals can be put on for very low initial premiums. Exhibit 34 shows the expected P&L in
percentage of notional at expiry of the SX5E Jun10 90/105 risk reversal. The SX5E is a
peculiarity: given that most dividend payments occur before the June expiry, this has the effect of
depressing the price of the risk reversal to a large discount to other indices (vanilla options do not
pay dividends).
-0.9%
-1.1%
SPX
SX5E
FTSE
N225
0.7%
0.8%
Another, more exotic way of selling skew to receive leveraged exposure are double knock-out call
options. Knock out options are an exotic derivatives which gives the same payoff as a vanilla
option, provided that the underlying stays between specified boundaries during the life of the
trade. As shown on Exhibit 36, the addition of a knock-out feature can significantly decrease the
premium paid for the option, with the premium of a Jun10 80/120% double knock out at-themoney call option being 3.1% only when the vanilla call option would be 5.7% (indicative).
Another interesting trade is double knock-out put options which could provide the investor with
limited protection on Equity downside at an even larger discount: the SX5E Jun10 80/120%
knock-out at-the-money put option would fully protect you for less than 20% slide in the SX5E
index, at a premium of 2.5% versus 8.2% for the vanilla put. For more details on knock-out
options, see our report Knock Out Puts and the market normalisation, dated 14 January 2009.
11
Derivatives Strategy
Exhibit 36: Indicative double knock-out option prices (at-the-money)
STE
SPX
30%
Outright Long
Long 90/103 Risky
20%
10%
0%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-10%
-20%
-30%
12
Derivatives Strategy
6M Vanilla Var
105% Knock In
UpVar
50
DownVar
40
30
20
10
11/02/0011/02/0111/02/0211/02/0311/02/0411/02/0511/02/0611/02/0711/02/0811/02/09
13
Derivatives Strategy
Long/Short Offer
SX5E/FTSE
5.10%
SX5E/SPX
4.90%
SX5E/N225
5.10%
Overseas
Emerging
60
50
40
30
20
10
0
01/07/04 27/01/05 25/08/05 23/03/06 19/10/06 17/05/07 13/12/07 10/07/08 05/02/09 03/09/09
14
Derivatives Strategy
Exhibit 43: SPX and SX5E 6M Implied Correlation
75%
70%
SPX 6M Implied Correlation
65%
65%
60%
55%
50%
45%
40%
60%
55%
50%
45%
40%
35%
35%
30%
10%
30%
09/01/06 09/07/06 09/01/07 09/07/07 09/01/08 09/07/08 09/01/09 09/07/09
15%
20%
25%
30%
35%
SPX 6M Implied Volatility
40%
45%
50%
55%
60%
3M ATM
Model
10D Realised
RIC
Implied Vol Volatility
Vol
PRU.L
39.5%
43.3%
29.47%
DAIGn.DE
34.9%
37.8%
25.78%
UBSN.VX
38.8%
41.3%
31.57%
IBR.MC
23.1%
25.3%
11.51%
EONGn.DE
25.1%
27.2%
15.42%
ENI.MI
24.4%
26.5%
15.29%
ALVG.DE
30.9%
33.0%
20.92%
HEIN.AS
24.3%
25.8%
17.59%
AXAF.PA
38.8%
40.2%
32.83%
SAN.MC
32.7%
34.1%
28.06%
ISP.MI
32.9%
34.2%
15.95%
STAN.L
37.1%
38.3%
39.82%
TLIT.MI
28.7%
29.7%
17.78%
SAB.L
24.3%
25.2%
18.70%
BATS.L
20.4%
21.2%
9.99%
RWEG.DE
22.3%
23.2%
12.89%
CRDI.MI
40.3%
41.1%
27.47%
TSCO.L
21.5%
22.1%
21.73%
TOTF.PA
24.9%
25.4%
14.15%
DGE.L
21.2%
21.6%
18.73%
We show on Exhibit 45 a list of European stocks where implied volatility is particularly cheap
based on our proprietary methodology (see our report The Factors behind Single Stock Volatility,
dated 17 December), with the most common factors for mispricing being Credit and Beta. Based
on Andre Garthwaites 2010 outlook, European banks with high leverage and where Credit
spreads have already significantly fallen, and European Capital Goods which are now exposed to
competitive threat from China, seem interesting for a long single stock volatility position. Overall it
seems that single stock volatility may be a good hedge for a potential correction in Equity markets
or Credit.
60
50
40
30
20
10
0
01/07/04
-10
07/04/05
12/01/06
19/10/06
26/07/07
01/05/08
05/02/09
12/11/09
-20
15
Derivatives Strategy
Overall, we find no statistical evidence of a relationship between exchange rates and company
earnings. We provide in Exhibits 48 and 49 scatterplots for 3-month changes in SX5E and SPX
aggregate FY1 earnings versus changes in the EuroDollar exchange rate (Euro/Deutsche Mark
prior to the Euro launch), which show no clear relation. We found R-squared in linear regressions
to be below 1%.
Exhibit 48: 3M change in SPX earnings vs Eurodollar
5%
0%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-5%
-10%
-15%
-20%
30%
10%
20%
10%
0%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-10%
-20%
-25%
-30%
3M Change in Eurodollar
-30%
3M Change in Eurodollar
Although FX/equity correlation is clearly unstable, Credit Suisses FX strategy team found that
equity-FX correlation goes through distinct regimes depending on equity performance. When
equities are rising or falling strongly relative to trend, FX tends to be highly correlated with
equities. However, when equities drift, FX decouples almost entirely from equities and interest
rate spreads become more important for FX determination (see Exhibit 50). This analysis
suggests that selling FX/Equity correlation in 2010 could yield interesting P&L should markets
start drifting (our favourite scenario), but could suffer losses in the event of another major rally or
renewed Equity stress.
Exhibit 50: 3M change in SPX earnings vs Eurodollar
"
A consequence of the payout dynamics, Equity forwards need to be adjusted for correlation, as
shown on Exhibit 51.
16
Derivatives Strategy
In Quanto world, in Exhibit 50 denotes the correlation between the underlying, and the currency
pair calculated as the number of underlying currency units per payout currency units. For an
SX5E Quanto USD forward, that would be the correlation between SX5E and the EURUSD
currency pair. A positive here would imply that a fall in SX5E would normally coincide with a rise
in the dollar, making a short Quanto forward position more interesting for the Eurozone investor: a
fall in SX5E would create a positive P&L in USD, which would in turn benefit from the
appreciation of the Dollar versus the Euro. In order to avoid arbitrage opportunities, the Quanto
forward has therefore to be adjusted downwards versus the forward: with positive , exp(stockFX t) will be inferior to 1.
Exhibit 51: Quanto/Composite pricing adjustments
Vanilla
(in underlying
currency)
Quanto
(in payout currency)
Composite
(in payout currency)
Forward
Fstock
Fstock *exp(-stockFX t
Fstock * fFX
Implied
Volatility
stock
stock
2
2
FX
+ 2 FX stock + stock
Discount
Rate
runderlying
rpayout
rpayout
Quanto dynamics therefore suggest the following trades which match our delta scenario of an
outperformance of SX5E versus SPX in 2010:
Exhibit 52: SPX/SX5E quanto vs
vanilla forwards
SPX Forward
SPX Quanto Forward
Yield dif (annualised)
SX5E Forward
SX5E Quanto Forward
Yield dif (annualised)
Jun-10
1,092
1,098
1.10%
2,810
2,803
-0.50%
Dec-10
1,084
1,096
1.11%
2,798
2,783
-0.54%
"
For a European investor willing to hedge Equity exposures in 2010, a better pricing could
be obtained by selling some FX/Equity correlation by going long puts, or short forwards,
on the SPX index quantoed in Euros. As shown on Exhibit 52, the calculated price of the
Dec10 SPX forward assuming 35% implied SPX/USD correlation is 1,084 while the
quanto forward is 1,096 a 110bps savings if you believe that correlation should be 0.
"
"
A US investor interested in going long Equity could decide to go long SX5E futures or
call options quantoed in USD with potential annual savings of 50bps for selling
SX5E/USD correlation at an implied rate of 16%. Alternatively, the same investor could
decide to sell SX5E put options if willing to sell some volatility in 2010.
"
Going short SPX Quanto Forwards while going long SPX forwards would give you
exposure to stockFX t, and make you short (almost) pure FX/Equity covariance.
However, this would also be a dangerous trade should FX/Equity correlation stay
unchanged while volatility increases. Investors willing to do a pure FX/Equity correlation
trade may consider buying back some Equity volatility (more on this later in this report).
For more information on Quanto products and trading FX/Equity correlation please refer to our
previous report FX/Equity Correlation Trades, dated 15 June 2009.
17
Derivatives Strategy
Commodities
Credit
USD
40
20
0
01/07/04
16/06/05
01/06/06
17/05/07
01/05/08
Looking at the correlation of Credit or Commodities to the SPX, we come to the same conclusion
as for FX/Equity correlation: the strength of the economic rally and the Dollar carry trade has
pushed cross-asset correlation to extreme levels that would be difficult to sustain in the long run.
Following the convergence in Credit volatility since June, Equity/Credit correlation has fallen back
to its long-term average of 0, leaving Commodity/Equity correlation as the most interesting short
play. We believe that Commodity/Equity correlation has now risen to unjustified extremes given
the expected impact of high commodity prices on input prices and long term inflation.
16/04/09
-20
-40
-60
The emergence of Exchange Traded Funds, some of which now enjoy liquid options markets (see
Exhibit 54), would allow an investor to trade this theme within an Equity framework, for instance
by going long SPX versus Oil outperformance options in a scenario where Oil prices, driven higher
by Chinas impressive economic rebound, would eventually decorrelate from a drifting SPX index.
A detailed report on cross-asset correlation and correlation trades with ETFs is forthcoming in
January 2010.
SPX
SX5E
USO
GLD
Individual Call
Basket Option
sensitivity to a 1 Individual Call option notional
pt chge in vol
option Vega needed
8,669
3,888
2,229,906
8,015
3,802
2,108,348
9,359
3,877
2,414,361
7,620
3,914
1,946,773
In order to exemplify how to go short cross-asset implied correlation, we look at a quanto call
option on an equally-weighted basket of SPX and SX5E on the Equity side and the USO and
GLD ETFs on the commodities side. USO and GLD are liquid ETFs traded in the US
benchmarked on Oil and Gold prices. An indicative offer price of the Dec10, ATM Basket call
option is 9.8%. The trade will make the option shorter short SPX/SX5E correlation around 80%,
Equity/Commodities correlation around 30%, and FX/Equity correlation around 30% - basically
playing 3 of our 2010 themes in one product only.
We suggest buying back vega on the individual names to cancel the sensitivity to volatility and
only keep the correlation exposure basically doing what is called call vs call dispersion: for
$10m notional an indicative premium would be 9.8% or $0.98m. The sensitivities of the options
price to a 1 vol point change in SPX, SX5E, USO and GLD volatilities are 8.7k, 8.0k, 9.3k and
7.6k respectively, which we hedge by going long options on individual indices or ETFs as
calculated in Exhibit 55.
18
Derivatives Strategy
From a practical standpoint, changes in baseline volatility, skew, and kurtosis can be intuited by
observing the volatility differentials in 50, 30, and 10 delta options respectively. Note that
although increases in baseline volatility and skew both play a role in the surge, the entire 4 point
differential between the actual vs. expected reaction of the VIX during the last week of October
can be explained by the change due to kurtosis. The effect of kurtosis can best be discerned by
comparing the SPX implied volatility smiles for Oct 22, Oct 30, and Nov 2. On these days, the
VIX closed at 20.69, 30.69, and 29.78 respectively.
Exhibit 56: Decomposition of VIX changes (end Oct) Exhibit 57: SPX skew Oct 22, 30 and Nov 2
Derivatives Strategy
Wilmot calls Phase 2 of the recovery. So far the US solution to jobless recoveries has been
liberal Credit. Now the credit channel has been foreclosed, what other solution if European-style
Welfare State is deemed politically unacceptable?
Exit Strategies and Banks funding crisis (again):
Increases in the refinancing rate remain a matter for H2 2010 or even 2011. However, the ECB
has already announced that it will tighten its conditions for providing funding to European Banks
(in brief, requiring at least two eligible ratings from an accepted external credit assessment
institution for all ABS issued as of 1 March 2010 provided as collateral). This measure is clearly
targeting the practice of securitizing ABS with the primary intent of making the underlying assets
eligible to be financed via the ECB.
According to Credit Suisse Rates strategists, the ECB policy has reached a point of inflection,
and the intent of policy going forward will be to create incentives for banks to rely more heavily on
market funding rather than ECB funding. Highest impact are likely to be felt in Spain, Ireland,
Greece and France which have seen the greatest increases in their banks lending as a
percentage of the total. These increases are even more striking given the huge increase in the
ECBs total lending. Will this forced migration from the ECBs full allotment refunding operations
be smooth? Not sure given the renewed difficulties of the Irish Greek and Spanish banking
systems.
Exhibit 58: Eurozone countries usage of ECB balance sheet
Nation Solvency:
After Ireland, can we see another country fail? Based on Andrew Garthwaites country
vulnerability scorecard, Greece and Spain fare worse than a number of emerging economies.
Exhibit 59: Andrew Garthwaites Country Risk screen
20
Derivatives Strategy
13%
10,000,000
12%
8,000,000
11%
6,000,000
10%
4,000,000
9%
2,000,000
STOXX50E
SPX
8%
0
05/01/07
-2,000,000
7%
6%
06/07/07
04/01/08
04/07/08
-4,000,000
5%
-6,000,000
4%
27/11/07
27/05/08
27/11/08
27/05/09
27/11/09
-8,000,000
21
02/01/09
03/07/09
Derivatives Strategy
Disclaimer
Europe
Stanislas Bourgois CFA
Raymond Hing
USA
Edward K. Tom
Sveinn Palsson
stanislas.bourgois@credit-suisse.com
raymond.hing@credit-suisse.com
ed.tom@credit-suisse.com
sveinn.palsson@credit-suisse.com
Oliver Groeteke
thomas.teague@credit-suisse.com
+49 69 75 38 2124
+49 69 75 38 2122
+49 69 75 38 2123
+44 20 7888 6810
oliver.groeteke@credit-suisse.com
dirk.bombe@credit-suisse.com
wolfgang.faust@credit-suisse.com
mikael.anden@credit-suisse.com
France/Benelux
David Cohen
Mustapha Arhab
Anne-Lise Bouaziz
david.cohen@credit-suisse.com
mustapha.arhab@credit-suisse.com
anne-lise.bouaziz@credit-suisse.com
Italy
Vincenzo Spadaro
Luca Mammoliti
Luca Lodi-Rizzini
vincenzo.spadaro@credit-suisse.com
luca.mammoliti@credit-suisse.com
luca.lodirizzini@credit-suisse.com
Iberia
Maite Suarez
+34 91 423 16 51
maite.suarez@credit-suisse.com
Jean-Paul Larcheveque
steve.jobber@credit-suisse.com
galina.bezuglaya@credit-suisse.com
jean-paul.larcheveque@credit-suisse.c
Structured/Hedge Funds
Matt Shelton
Stephanie Hoefling
matthew.shelton@credit-suisse.com
stephanie.hoefling@credit-suisse.com
nathaniel.foster@credit-suisse.com
daniel.carr@credit-suisse.com
azeem.arshad@credit-suisse.com
divya.taank@credit-suisse.com
edward.philips@credit-suisse.com
matthew.brown.2@credit-suisse.com
Edward Philipps
Matthew Brown
http://www.cboe.com/LearnCenter/pdf/characteristicsandrisks.pdf
Dirk Bombe
Wolfgang Faust
Mikael Anden
Emerging Markets
Steve Jobbber
Galina Bezuglaya
Structured securities, derivatives and options are complex instruments that are
not suitable for every investor, may involve a high degree of risk, and may be
appropriate investments only for sophisticated investors who are capable of
understanding and assuming the risks involved. Supporting documentation
for any claims, comparisons, recommendations, statistics or other technical
data will be supplied upon request. Any trade information is preliminary and
not intended as an official transaction confirmation. Use the following links to
read the Options Clearing Corporation's disclosure document:
22
http://www.creditsuisse.com/en/who_we_are/ourstructure.html
This material has been prepared by individual sales and/or trading personnel
of Credit Suisse Securities (Europe) Limited or its subsidiaries or affiliates
(collectively "Credit Suisse") and not by Credit Suisse's research department.
It is not investment research or a research recommendation for the purposes
of FSA rules as it does not constitute substantive research or analysis. All
Credit Suisse Investment Banking Division research recommendations can be
accessed
through
the
following
hyperlink:
<http://www.creditsuisse.com/researchandanalytics> subject to the use of a suitable login. This
material is provided for information purposes, is intended for your use only and
does not constitute an invitation or offer to subscribe for or purchase any of
the products or services mentioned. The information provided is not intended
to provide a sufficient basis on which to make an investment decision. It is
intended only to provide observations and views of the said individual sales
and/or trading personnel, which may be different from, or inconsistent with,
the observations and views of Credit Suisse analysts or other Credit Suisse
sales and/or trading personnel, or the proprietary positions of Credit Suisse.
Observations and views of the salesperson or trader may change at any time
without notice. Information and opinions presented in this material have been
obtained or derived from sources believed by Credit Suisse to be reliable, but
Credit Suisse makes no representation as to their accuracy or completeness.
Credit Suisse accepts no liability for loss arising from the use of this material.
This material is directed exclusively at Credit Suisse's market professional and
institutional investor customers, i.e. market counterparties and intermediate
customers as defined by the rules of the Financial Services Authority. It is not
intended for private customers and such persons should not rely on this
material. Moreover, any investment or service to which this material may
relate, will not be made available by Credit Suisse to such private customers.
All valuations are subject to Credit Suisse valuation terms. Information
provided on trades executed with Credit Suisse will not constitute an official
confirmation of the trade details.
Credit Suisse Securities (Europe) Limited is authorised and regulated by the
Financial Services Authority.