File 014972
Global Equity Volatility Insights - BofA Merrill Lynch Research Report (File 014972)
A BofA Merrill Lynch equity derivatives research report dated June 20, 2017, providing investment strategies and volatility analysis across global markets including US equities, European banks, and Asian markets.
Summary
This equity derivatives research report from BofA Merrill Lynch analyzes global market volatility and recommends strategic positioning across three main regions. For the US market, analysts recommend a range-trading strategy using out-of-the-money puts on the S&P 500 given Fed policy uncertainty. In Europe, the report suggests positioning for EU bank sector dispersion through structured derivatives strategies, noting historically low implied volatility. For Asia, analysts recommend variance spread trades on Chinese versus US equity volatility, citing expected divergence from global monetary tightening impacts.
Global Equity Volatility InsightsWant a cheap call on EU equity? Monetisecorrelation through EU bank dispersionwe estimate 68% of the20 June 2017Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.comUSExtract alpha from summer SPX range as policy and positioning “collar” equitiesWith the Federal Reserve last week appearing more emboldened to normalize monetarypolicy, risk asset bears have come out in force. While we agree that a changing Fedreaction function is likely not supportive of substantial equity upside, we think the“Yellen put” still exists, albeit with a lower strike. Hence, we see monetary policy asproviding a near-term “collar” (long put/short call) on a US equity market already proneto getting trapped in record-tight trading ranges. Further impetus for a summer rangetradeshould come from (i) fiscal policy, as gridlock caps equity upside but policy hopefloors the downside, and (ii) positioning, where the risk of continued “fragility events”(potentially exacerbated by stretched quant fund/short vol positioning) meets cashed-upinvestors still accustomed to buying dips. As a risk-limited range trade, we like buyingin-the-money down and out puts on the S&P. For example, an SPX Sep 2475 put thatknocks out at 2300 (6% OTM) indicatively costs 70bps (spot ref 2451), a 60% discountto the 2475 / 2300 put spread.EuropeLong EU banks dispersion: Buy Dec17 call on a basket, sell worst-of callWe recommend positioning for greater dispersion in EU bank sector returns via buying aDec17 105% call on an equally-weighted basket of Santander, BNP, ING, Intesa andDeutsche Bank, part-financed by selling a worst-of call on the same basket for 1.8%(net) indic., as: 1) improving macro/earnings, sensitivity to rates and regulatoryheadwinds are likely to lead to greater differentiation within banks, 2) the entry point isattractive given historically low implied vol (13 th 8y+ percentile) and high impliedcorrelation (81% bid vs latest 6M realised correl of 66%), 3) historical risk-reward atcurrent pricing is attractive (avg. P&L of +8.4% when positive vs -1.8% when negative),and 4) the trade can be considered as a cheap call on EU equities as it has a similarpayoff profile but with greater benefit relative to its cost.AsiaBuy depressed China vs. US risks through corridor variance spreadsAs global central banks have taken on more hawkish tones, the uncertainty surroundingpolicy tightening will be more positive for EM volatility than for DM volatility.Additionally, our strategists have a more bearish outlook for the Chinese banking sector(which makes up a majority of the HSCEI index) amid rapidly rising leverage, complexshadow banking, and excessive home price inflation. Since we believe the globalsynchronized monetary tightening will impact HSCEI volatility more than SPX volatility,we recommend owning HSCEI-SPX 70/110% corridor variance at 5 vol points, a 3 volpoint discount to a vanilla variance spread. The entry point is attractive as the HSCEI-SPX 18-month variance swap spread has fallen back to the lower-end of its 5-yeartrading range, the trade has a positive carry, and it benefits during China risk-off events.>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst underthe FINRA rules.Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that takeresponsibility for this report in particular jurisdictions.BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in makingtheir investment decision.Refer to important disclosures on page 28 to 29. Analyst Certification on page 27. 11756528Timestamp: 20 June 2017 01:18AM EDTEquity DerivativesGlobalGlobal Equity Derivatives RschMLPF&SAnshul Gupta >>Equity-Linked AnalystMLI (UK)Nitin SaksenaEquity-Linked AnalystMLPF&SWilliam Chan, CFA >>Equity-Linked AnalystMerrill Lynch (Hong Kong)Abhinandan Deb >>Equity-Linked AnalystMLI (UK)Benjamin BowlerEquity-Linked AnalystMLPF&Sbenjamin.bowler@baml.comJason Galazidis >>Equity-Linked AnalystMLI (UK)Clovis Couasnon >>Equity-Linked AnalystMLI (UK)Chintan KotechaEquity-Linked AnalystMLPF&SMichael YoungworthEquity-Linked AnalystMLPF&SNikolay AngeloffEquity-Linked AnalystMLPF&SSee Team Page for List of AnalystsTable 1: 3M volatility (weekly changes)Implied RealizedS&P500 9.8 (-0.2) 7.1 (-0.2)ESTX50 13.4 (0.3) 11.5 (0.2)FTSE 10.0 (-0.4) 9.7 (0.2)DAX 12.6 (0.3) 10.7 (0.5)NKY 13.8 (-0.2) 12.3 (-0.2)HSI 12.4 (0.1) 10.1 (0.2)KOSPI 12.2 (0.3) 10.5 (0.1)EEM US 15.6 (0.5) 11.8 (-1.1)TOP40 16.9 (1.2) 11.1 (0.3)RDX 25.9 (0.9) 20.6 (-1.1)IBOV 22.9 (-1.7) 25.5 (-0.7)ISE30 20.2 (0.4) 13.5 (0.1)Source: BofA Merrill Lynch Global ResearchBofAML GFSI TM X-Asset Risk LandscapeStress now below normal for all asset classesThe indicator was little changed last week, finishing at -0.23.• Stress is now in benign territory across all five asset classes: Stress inacross all asset classes (except equity) declined last week. Notably, rates stressturned negative (benign territory) and stresses across all five asset classes arenow negative.• Stress in Equity skew rose as ESTX50 and (to a lesser extent) S&P500 skewsteepened; indeed the gain in ESTX50 skew was the greatest across GFSI subcomponents(Chart 2) and also historically significant (Chart 5).• Commodity-related stresses fell the most across asset classes (Chart 3), ledby declines in Crude and Gold vol (Chart 2), reversing some of the gains aftergeopolitical tensions in the Middle East rose in recent weeks.Chart 1: Latest* stress across GFSI sub-components2.01.51.00.50.0-0.5-1.0-1.5-2.0GFSI Stress1.481.39Govt-OIS EURBasis Swap USDJPY1.000.81Basis Swap EURUSDEuro member Bond…0.54Nikkei SkewRed shaded area highlights components inBearish territoryESTX50 SkewBond Basis EURGovt-OIS USDHY Bond FlowSource: BofA Merrill Lynch Global Research. *Latest as of 16-Jun-17.RiskSkewFlowGreen shaded area highlights components inBullish territory-1.17-1.18-1.24-1.38-1.45CDS Index Skew USDCDS Index Skew EURUSDJPY SkewBond Basis USDLibor-OIS USDEquity Fund Flow EMSP500 SkewIG Foreign Sovrn Bond…Libor-OIS GBPGBPUSD Imp VolLibor-OIS JPYEURJPY SkewSub IG Foreign Sovrn…Libor-OIS EURHY Corp CDS USDIG Corp CDS USDIG Corp CDS EURComdty Imp Vol CrudeVolume FlowHY Corp CDS EURAUDJPY SkewHSI Imp VolUSDJPY Imp VolFTSE Imp VolMoney Mkt FlowESTX50 Imp VolComdty Imp Vol CopperSP500 Imp Vol3Y/5Y Credit Curve EURInt Rate Imp Vol USDComdty Imp Vol GoldNikkei Imp VolEURUSD Imp VolInt Rate Imp Vol EURChart 2: Change** in stress across GFSI sub-components0.8Change in GFSI Stress0.40.0-0.4-0.80.65ESTX50 Skew0.21CDS Index Skew EUR0.120.10SP500 SkewGBPUSD Imp Vol0.07Libor-OIS USDSource: BofA Merrill Lynch Global Research. **Latest as of 16-Jun-17. Change vs 1 week prior (9-Jun-17).The GFSI Risk Allocator (using Bull, Bear & Neutral weights of 2, 0, 1) suggested a 17.4%overweight position on 16-Jun (vs 13.0% OW as of 9-Jun). The percentages of Bullish,Bearish and Neutral GFSI components (as used in the Risk Allocator) as of 16-Jun were34.8%, 17.4% and 47.8% respectively.-0.20-0.23-0.23-0.37-0.38Govt-OIS USDGovt-OIS EURESTX50 Imp VolEquity Fund Flow EMHY Corp CDS USDBond Basis USDSub IG Foreign Sovrn…IG Corp CDS USDHSI Imp VolNikkei SkewUSDJPY Imp VolLibor-OIS JPYLibor-OIS EURMoney Mkt FlowHY Corp CDS EURIG Foreign Sovrn Bond…HY Bond FlowLibor-OIS GBPSP500 Imp VolNikkei Imp VolIG Corp CDS EUR3Y/5Y Credit Curve EUREURJPY SkewFTSE Imp VolInt Rate Imp Vol USDComdty Imp Vol CopperInt Rate Imp Vol EUREuro member Bond…EURUSD Imp VolCDS Index Skew USDBasis Swap EURUSDBasis Swap USDJPYComdty Imp Vol GoldAUDJPY SkewComdty Imp Vol CrudeUSDJPY SkewBond Basis EURVolume FlowRiskSkewFlow2 Global Equity Volatility Insights | 20 June 2017Chart 3: Stress in commodities fell the most last week (driven by a dropin crude oil vol) while stress in equities rose marginally (led by equityskew)0.20.0-0.2-0.4-0.6-0.8-1.00.04-0.03 -0.03 -0.08-0.16Equities Credit Rates FX CommoditiesChart 4: EM and the US are the least stressed GFSI regions globally0.050.00-0.05-0.10-0.15-0.20-0.25-0.30-0.35-0.400.020.02-0.01 -0.03EM Europe Japan USLatest stress (16-Jun-17)Change in stressLatest stress (16-Jun-17)Change in stressSource: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17).Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17).Chart 5: Top 10 movers in stress (1-week abs chg %-ile vs history*)%-ile of abs chg in stress vs history*100%90%80%70%60%50%92%ESTX50 Skew83% 82% 82% 81% 80% 79% 79% 77%Libor-OIS USDUSDJPY SkewBond Basis EURBasis SwapEURUSDComdty Imp VolGoldBasis SwapUSDJPY67%Source: BofA Merrill Lynch Global Research. * %-ile of weekly move in stress vs all historical weeklymoves (earliest 3-Jan-00). Bar colours represent rise (red) or fall (green) in stress. 1wk change (9-Jun-17 to 16-Jun-17).AUDJPY SkewStress fallStress riseEuro memberBond SpreadComdty Imp VolCrudeChart 6: Global volatility & credit spread stress in the GFSI0.20.0-0.2-0.4-0.6-0.8-1.0-1.2-1.40.01 0.01HY CDSLatest stress (16-Jun-17)FX VolIG CDS0.00 -0.01 -0.02 -0.06Equity VolChange in stressSovrn riskSource: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17).Rates Vol-0.16Commodity VolGlobal Equity Volatility Insights | 20 June 2017 3Volatility in the USRisk-limited alpha in a “collared” market: SPX ITM KO putsUS equities vulnerable…to a summer range-tradeThe Federal Reserve last week appeared more emboldened to normalize monetarypolicy, not only raising interest rates by 25bps but also reiterating its intention to hikefour more times by the end of 2018 and stating that it “expects to begin implementinga balance sheet normalization program this year” - all despite recent softness ininflation data. Breakeven rates of inflation narrowed following the Fed communicationsdue to tighter monetary conditions in the face of slowing US economic data, and riskasset bears responded in force, suggesting that Janet Yellen had “broken up” withinvestors and that it would be prudent to sell “before it’s too late”.We agree that the changing reaction function of the Fed is likely not supportive offurther substantial US equity upside and may be viewed as the Fed now providing ashort call option on the S&P 500. However, in our view, it is premature to concludefrom last week’s developments that the “Yellen put” is dead. We see its strike asdeclining but would not underestimate Yellen’s dovish inclinations in a shock or thecapacity for the Fed to still remain credibly on hold as long as the US economy is not“running hot”.In short, we see monetary policy as now providing a “collar” (long put / short call) on aUS equity market that has already shown a propensity over the past year for gettingtrapped in record tight trading ranges. 1 Other factors may also conspire to create asummer range-trade for US equities, namely (i) fiscal policy, where gridlock likely capsequity upside but lingering policy hope floors the downside, and (ii) positioning, wherethe risk of continued “fragility events” (potentially exacerbated by stretched quantfund/short vol positioning) meets cashed-up investors still accustomed to buying dips.Tug of war between fragile market/stretched positioning and cashed-up dip-buyersAs we have noted recently, US equities have displayed a historically unusual tendency tojump rapidly from calm to stress and back (“fragility”), with the recent Tech sell-off andrebound the latest example. For example, in the past year, the S&P 500 has seen5sigma declines (3 in total—Brexit, Sep-16, May-17) occur 20x more frequently thanover the prior 90 years or so. The increased frequency of these “fragility events” is inpart due to vol failing to remain high post a spike as equity market participants continueto aggressively “buy the dip” and in the process reset vol lower.Historically low vol alongside consistently upward trending equity markets and low crossasset correlations could be creating stretched positioning across markets. For example,upward trending equities on historically low vol may be pushing CTA equity positioningto near record levels (Chart 7). Risk parity portfolios could be increasing their leveragedue to low vol as well as low cross asset correlation (Chart 8). And lastly, inverse VIXETPs have seen increased open interest as performance has swelled on the back ofcontinued declines in vol and attractive term structure risk premia (Chart 9).Should vol spike again alongside a reversal in equity price momentum and a rise in crossasset correlations, then unwinds from these strategies could exacerbate market fragility.However, this must be weighed against an investor base that has plenty of cash on hand(Chart 10) and their potentially fickle but still-intact tendency to view any equity marketdip as an alpha opportunity.1For example, the Dow Jones Industrial Average traded in its tightest trading range in over110 years in Jan-17; this followed a record in the S&P 500 ending Sep-16 for the longeststretch of trading within a range of 1.77% since 1928.4 Global Equity Volatility Insights | 20 June 2017Chart 7: A combination of upward trending global equity markets andvery low volatility have conspired to push trend following (CTA) equitypositioning to near record levels. Consequently, the beta of CTAstrategies to global equities is also at extreme levelsChart 8: Owing to low cross asset vol and strong diversification, thevolatility of risk-balanced multi-asset portfolios has fallen to historicallylow levels. Consequently, leverage levels across multi-asset & otherportfolios that target fixed vol have likely hit their caps1.000.750.500.250.00-0.25-0.50-0.75-1.00Jan-15Mar-15May-15Jul-15Sep-15Nov-15Jan-16Mar-16May-16Jul-16Sep-16Nov-16Jan-17Mar-17MSCI World (Ratio of trend strength to volatility) (LHS)BofAML Model CTA Global Equity Allocation (RHS)May-1720151050-5-10-15-2024%20%16%12%8%4%0%1972197519781981198419871990199319961999200220052008201120142017Model Risk Parity Leverage (Vol Target: 10% & Max Leverage: 3x) (RHS)Unlevered BofAML Model Risk Parity Volatility (LHS)3.0x2.5x2.0x1.5x1.0x0.5x0.0xSource: BofA Merrill Lynch Global Research. Based on daily data form 2-Jan-2015 to 16-Jun-2017.CTA = Commodity Trading AdvisorIt is important to note that not all CTA, risk parity, or vol control strategies operatesimilarly and there is model risk in estimating the exact size of these trading flows.Source: BofA Merrill Lynch Global Research. Based on daily data from 3-Jan-72 through 16-Jun-17.Equity, fixed income, and commodity components within the hypothetical risk parity investment arerepresented by the S&P500, 10-Year US Treasury Bonds, and the S&P GSCI Index, respectively. Riskparity allocations are determined and rebalanced monthly using prior 12-month realized volatilityand correlations.Chart 9: The vega outstanding in inverse VIX ETNs has also reached arecord high at ~$125mn vegaChart 10: Global FMS average cash balances (%) remain elevated,suggesting dry powder for investors still conditioned to buy equity dipsVIX ETP open interest ($mn vega)350Unlevered longLevered long300InverseNet vega across VIX ETPs250200150100500-50-100-1502012 2013 2014 2015 2016 2017Source: BofA Merrill Lynch Global Research. Daily data from 13-Feb-12 through 16-Jun17.Extract risk-limited alpha from SPX range via cheap in-the-money knockout putsAs a risk-limited range trade, we like owning down-and-out puts on SPX that are alreadyin-the-money. For example, the SPX Sep 2475 put with a 2300 knock-out (continuousobservation) indicatively costs 70bps (spot ref 2451) and offers a 60% discount to thevanilla 2475/2300 put spread, which is itself historically cheap (Chart 12).If SPX stays above the 2300 barrier at all points in time before expiry, the structure isequivalent to a 2475 put option. If the barrier is instead breached, the maximum losswill be equal to the (low) upfront premium. The 2300 barrier is about 6% out-of-themoney,hence “allows” for the elusive 5% correction not seen since Brexit (on a closingbasis). However, investors can mitigate the risk of breaching the barrier by eithermoving it farther down (e.g., a 2245 barrier would indicatively raise the cost from 0.7%to 1%), or by only observing it on a close-to-close basis (in turn sacrificing part of thediscount).6.0%5.5%5.0%4.5%4.0%3.5%Backtest Actual3.0%'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '1724002200200018001600140012001000FMS avg cash balance (%)S&P 500 (RHS)Source: BofA Merrill Lynch Global Fund Manager Survey, Bloomberg. As a reminder, the FMS CashRule works as follows: when average cash balance rises above 4.5% a contrarian buy signal isgenerated for equities. When the cash balance falls below 3.5% a contrarian sell signal is generated.800600Global Equity Volatility Insights | 20 June 2017 5The trade prices attractively today due to exceptionally steep SPX put skew, which isnear its highs established since 2004 (Chart 11). With steep SPX put skew, the marketis implicitly pricing in a high probability that the option will knock-out during its life, i.e.,that relatively large drawdowns are more likely. As detailed above, however, we seemany reasons why the most likely near-term scenario for US equities is to remainrange-bound. The structure is short 11% delta at inception and has the same vegasensitivity as the equivalent put spread (short 6bps).Chart 11: SPX put skew is near the all-time highs reached since 2002.Steep skew helps cheapen knockout puts as the market is implying arelatively high probability of the barrier being breachedChart 12: The price of SPX put spreads is already near the lows reachedsince 2002. In particular, the price of a 3m 50d-25d put spread is~1.02%, in the 0.1 st %-ile since Nov-027.5%7.0%6.5%6.0%5.5%5.0%4.5%4.0%3.5%3.0%9%8%7%6%5%4%3%2%1%0%Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Nov-02Nov-03Nov-04Nov-05Nov-06Nov-07Nov-08Nov-09Nov-10Nov-11Nov-12Nov-13Nov-14Nov-15Nov-16SPX 3m 90-100 put skew16-Jun-17SPX 3m 50d - 25d put spread16-Jun-17Source: BofA Merrill Lynch Global Research. Data from Jan-04 to 16-Jun-17. The 90 and 100 strikesare based on the SPX forward.Source: BofA Merrill Lynch Global Research. Data from Nov-02 to 16-Jun-17.6 Global Equity Volatility Insights | 20 June 2017Notable trends and dislocations (US)The Fed turns more hawkish, though vol remains subduedLast week, unsurprisingly the Fed opted to hike benchmark rates another 25bps.However, the market was more focused on the FOMC’s unexpectedly hawkish message,which indicated that it is willing to normalize policy despite weaker-than-desiredinflation. Our economists now think the Fed will announce balance sheet normalizationin September and will hike rates again in December. A more hawkish Fed could result inhigher real rates and a stronger USD, which ultimately should benefit our Growth toValue rotation trade of long XLF calls versus short QQQ calls (see Chart 15). The S&P500 was more-or-less flat week-over-week as it gained only 6bps. The tech selloffcontinued, however, and the Nasdaq-100 dropped 105bps. Similarly, the Russell 2000also dropped 105bps. Despite concerns on the Fed, the VIX fell 0.32 vol points to 10.38,and SPX 1m ATM implied vol declined 0.3 vol points to 7.6%.Chart 13: The Nasdaq has set a new record for consecutive days withouta 5% peak-to-trough drawdown16014012010080604020150136135111104989795949286747167656156555453515050484646434038302821171511111111875On June 9, the Nasdaq dropped nearly 2% as investors unwoundcrowded positions, resulting in a sudden selloff from a period ofrelative calm. However, despite the volatility among tech namesduring the first week of June, the Nasdaq (CCMP) has not seen a5% drawdown from a prior peak (using closing data) in 150days. This is the longest such streak in the Nasdaq’s history.Prior to today, the longest periods of similar calm occurredduring July ’83 and July ’86, when the index did not record a 5%drawdown from a peak in 136 and 135 days respectively.016-Jun-1714-Jul-8627-Feb-9721-Jun-7122-Nov-9320-Aug-1519-Nov-913-Nov-1629-Sep-8029-Mar-945-Feb-994-Oct-958-Dec-8014-Apr-873-Mar-8014-Mar-0022-Jul-9921-Sep-7819-Apr-9928-Jan-0015-Oct-99Source: BofA Merrill Lynch Global Research. Data from 1-Feb-71 to 16-Jun-17. Drawdowns measuredfrom prior peaks and using close-to-close data.Chart 14: On 16-Jun, the SPX had its 11 th consecutive session of movesnot exceeding 0.5% in either direction on a close-to-close basis. This isthe 4 th time this year that such a streak has surpassed 10 days50403020100'64 '65 '52 '17 '59 '62 '63 '67 '95 '51 '53 '66 '68 '72 '93 '16Max # of days without an up or down move > 0.5% (LHS)# times SPX has gone for 10 days w/o a 0.5% move (RHS)Source: BofA Merrill Lynch Global Research, Bloomberg. Data from Jan-1928 to 16-Jun-2017.1086420Last week the S&P 500 recorded its 11 th session without amove larger than 0.5% in either direction. As a result, 10drealized vol stood at 3.31% as of 16-Jun.This is already the fourth time this year that SPX has gone morethan 10 consecutive days without a move greater than +/- 0.5%.This has historically happened only in ’64, ’65 and ’52. Thelongest such stretch this year lasted 15 consecutive tradingsessions and ended on 16-May. For comparison, in ’64 SPX had8 stretches without such a move with the longest stretchspanning 43 days.Global Equity Volatility Insights | 20 June 2017 7Chart 15: Buying an XLF 1m ATM call financed by selling a QQQ 1m call isstill an attractive way for investors to rotate out of Growth and intoValue1.31.10.90.70.52012 2013 2014 2015 2016 2017# of 1m XLF calls one 1m QQQ call buysCurrent (99th %-ile)AverageLast week, we highlighted that investors who want to rotate outof Growth strategies into Value strategies should takeadvantage of elevated tech vol by buying XLF 1m ATM callsfinanced by selling QQQ 1m ATM calls. After last week’s FOMCmeeting, the case for such a trade grows even stronger as themarket thinks the Fed has become more hawkish, driving upreal rates and the USD. Amid this backdrop, one could seeoutperformance of Value names over Growth names, which tendto have higher amounts of offshore revenues that would comeunder pressure by a stronger dollar.Additionally, the trade remains attractive at current levels aspricing has only been better 1% of the time in 5 years. Today,1.03 XLF calls could be bought for each QQQ call sold, whereasover the past 5 years, the average number of XLF calls thatcould be purchased was only 0.80.Source: BofA Merrill Lynch Global Research. Data from 9-Jun-12 to 16-Jun-17.Table 2: Current S&P500 volatility and correlation measures relative to the prior two year of historical daily data1-week changeOver 2-year historical period16 Jun 17 9 Jun 17 ChangeCurrentrankingMinimum 25% Median 75% Maximum1-month ATM implied volatility 7.6% 7.9% -0.3% 1.3% 7.1% 9.8% 11.7% 14.5% 31.8%1-year ATM implied volatility 14.0% 14.0% 0.0% 7.7% 13.4% 15.3% 16.2% 17.3% 22.5%1-week intraday realized volatility 7.8% 7.3% 0.5% 19.6% 5.2% 8.3% 10.6% 14.0% 53.7%1-year minus 1-month term structure 6.5% 6.1% 0.4% 99.2% -12.0% 2.7% 4.4% 5.4% 7.0%3-month 90 minus 110 skew 8.5% 8.3% 0.2% 16.1% 7.1% 9.4% 11.3% 11.8% 13.8%1-year top 50 implied correlation 45.44 45.10 0.35 8.1% 42.03 49.37 54.22 57.14 65.553-month top 50 realized correlation 21.30 24.08 -2.78 16.8% 12.57 27.15 37.28 48.45 60.41VIX 1-month ATMf implied vol 81.9% 80.0% 1.9% 39.9% 61.2% 78.2% 85.0% 95.2% 162.2%VIX 1-month 110 minus 90 skew 27.1% 26.9% 0.2% 88.6% 9.3% 18.6% 21.5% 23.8% 30.3%Source: BofA Merrill Lynch Global Research8 Global Equity Volatility Insights | 20 June 2017Volatility in EuropeBuy EU banks dispersion: (+) basket call, (-) worst-of callsTrade: Long Dec17 105% call on an equally weighted basket of SAN, BNP, ING,ISP & DBK*, short Dec17 ATM worst-of call on the same basket for 1.8% indic.(correl bid: 81%).* We pick the top 5 stocks with the largest market cap within the SX7E (EU banks sectorindex) corresponding to 5 different countriesWe have previously highlighted our preference for vol dispersion trades both in the USand the EU – with the most recent recommendation being sector dispersionopportunities within the EU. In a similar vein, we suggest positioning for greaterdispersion within EU banks via buying a call on a basket of Santander, BNP Paribas, ING,Intesa and Deutsche Bank part-financed by selling a worst-of call on the same basket as:• Improving macro/earnings, sensitivity to rates and regulatory headwinds likelyto lead to greater differentiation within banks: An improving macro backdrop inEurope & ongoing improvement in EPS revisions (see Style Cycle) paint a bullishpicture for EU banks as they are seen as leveraged macro plays within the EU.However, we believe there is a potential for greater differentiation within banks asour bank analysts have argued before (here and here) that: (i) some banks stand tobenefit more than others based on their earnings power should the uptick in theearnings cycle continue, (ii) banks’ gearing to interest rate cycles, and thereforelikely impact from a more hawkish ECB, varies between different banks and (iii)French and Benelux banks are likely to be most impacted under potential Basel IVregulations.• Entry point is attractive given historically low implied vols: The structurebenefits from its long vol bias as average 6M implied vol on the basket of 5European banks is historically low (13 th %-ile since Jan-08, Chart 16).• High implied correlation beneficial for structure’s short correlation bias: Chart17 shows the average pairwise 6M and 3M realised correlations between the 5 EUbanks, which are historically low. Despite this recent drop in realised correlations,implied correlation is priced higher, thus providing an interesting entry point for the(short-correlation) trade.Global Equity Volatility Insights | 20 June 2017 9Chart 16: SAN, BNP, ING, ISP and DBK average 6M ATMf implied vol istrading historically low (13 th percentile since 2008)100%80%60%40%20%Mar-08Mar-09Mar-10Mar-11Basket of SAN, BNP, ING, ISP & DBKMar-12Mar-13Mar-14Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-1713th percentileMar-15Mar-16Mar-176M avg realised vol 6M avg implied vol Last IV (16-Jun-17)Chart 17: Despite the recent drop in realized correlation, impliedcorrelation is priced near the high end of the reaiised range for thebasket of EU banks90%80%70%60%50%40%30%Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-173M realised correl 6M realised correl Dec17 implied correlSource: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17• Attractive risk-reward profile at current pricing: As highlighted in Exhibit 1,historically the trade held to expiry, at current pricing, would have generated anaverage P&L of 8.4% when positive and -1.8% when negative. The risk-rewardlooks even more attractive in extreme market outcomes as the max P&L of thetrade which is greater than 75% compares to the max loss of only 5.7%. The tradealso provides an effective way to gain long exposure to EU equities with limitedrisks, as evident from the call-like payoff in Exhibit 1 (vs the ESTX50). It is worthnoting that, by construction, the maximum loss of the trade is 6.8% with the mostlikely loss limited to the upfront premium of 1.8%. We also note that the tradepayoff profile is superior to a SX5E Dec17 ATM call when sized such that: (i) the callpremium is the same as the upfront premium for the dispersion trade (=1.8%, blueline), as well as (ii) when the call premium is the same as the theoretical maximumloss for the trade (=6.8%, orange line).Exhibit 1: Hypothetical back-test of long Dec17 105% call on a basket of SAN, BNP, ING, ISP & DBK, short Dec17 ATM worst-of call on the same basket(upfront premium = 1.8%)80%ESTX50 6M returnsTrade P&L (long basket call, short worst-of)80%P&L60%Avg P&L when positive: 8.4%Avg P&L when negative: -1.8%70%60%40%50%40%20%30%0%-20%20%10%0%SX5E 0.46x Dec17 ~ATM call-40%Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17-10%SX5E 1.7x Dec17 ~ATM callSX5E returns-20%-60% -40% -20% 0% 20% 40% 60%Source: BofA Merrill Lynch Global Research. Data: 3-Jan-00 to 16-Jun-17. Back-testing is hypothetical in nature & reflects application of the strategy prior to its introduction. It is not actual performance & is not intended tobe indicative of future performance. The two call payoff diagrams shown in the chart correspond to SX5E Dec17 3575 strike call sized such that upfront premium = 1.8% (0.46x notional, blue line, equal to the upfrontpremium for the trade) and 6.8% (1.7x notional, orange line, equal to potential max loss of the trade)10 Global Equity Volatility Insights | 20 June 2017Notable trends and dislocations (Europe)European equities ended the week lower mainly due to a tech-driven sell-off on 12-Junduring which the SX8P (European tech sector) witnessed its largest 1-day decline sincethe UK’s EU referendum. Nevertheless, implied vols across European indices remainedmostly unchanged near 2 year lows.• European intra-sector correlation continues to decline while inter-sectorcorrel has hit a floor: The average EU intra-sector 3m correlation is near a 10-year low currently. In contrast, the average 3m inter-sector correlation reached a10-year low in Mar-17 driven by post US election reflation trades but is nowrising off its lows likely driven by an unwind of reflation trades.• SX7E implied-realised correlation near 5-year highs: SX7E 6m impliedcorrelation fell since Mar-17 but the implied-realised correlation spread remainsin the 88 th 5-year percentile driven by even lower realised correlation.• ESTX50 3M put skew is near 5 year highs, in stark contrast to SXEP(European Oil & Gas equity) put skew which is close to 5 year lows.• The overall seasonality in ESTX50 realised volatility since 1987 has been one ofrelatively lower vol during the summer months vs. autumn. In particular, Maystands out as the lowest vol month across most 10 year horizons, and thisalso appears to be the case so far this year.EU Intra-sector correl continues to decline while inter-sector correl is supportedThe average European intra-sector 3m correlation is near a 10-year low, partly driven bydivergence within the personal & household goods, utilities, real-estate, autos andinsurance sectors (Chart 18 and Table 3). Interestingly, the average 3m inter-sectorcorrelation reached a 10-year low on 14-Mar-17 (as the 8-Nov-16 US election led to theoutperformance of sectors sensitive to inflation) but inter-sector correlation now seemssupported likely driven by the unwind of reflation trades (Chart 18).Global Equity Volatility Insights | 20 June 2017 11Chart 18: European intra-sector realised correlation is near a 10-yearlow, which suggests that we are currently in a stock pickersenvironment100%80%60%40%20%0%Jun-07Feb-08Oct-08Average SXXP 3m inter-sector correlation*Average SXXP 3m intra-sector correlation**4th 10-yrpercentileJun-09Feb-10Oct-10Jun-11Feb-12Source: BofA Merrill Lynch Global Research. 3m correlations calculated using daily returns andassuming current weights. Data from 16-Mar-07 to 16-Jun-17. *Average correlation between each ofthe 19 SXXP sector indices and the other SXXP sector indices. **Average of the 19 intra-sectorcorrelations (in Euro) where the 19 sector indices are the indices which make up the SXXP index.Note that the average intra-sector correlation calculated using returns in local currencies is also neara 10-year low (2 nd 10-yr percentile).Oct-12Jun-13Feb-143rd 10-yr percentileOct-14Jun-15Feb-16Oct-16Jun-17Table 3: Personal & household goods, utilities, real-estate, autos andinsurance are the top 5 sectors with the lowest 10-yr percentile of intrasector3m realised correlationIntra-sector 3M correlSector ticker Sector name Level 10yr %-ileSXQP Pers. & Hous. Goods 17% 0%SX6P Utilities 24% 1%SX86P Real estate 40% 1%SXAP Autos 41% 1%SXIP Insurance 32% 1%SXRP Retail 19% 4%SXTP Travel 26% 5%SXFP Financials 28% 5%SX4P Chemicals 28% 6%SXNP Industrials 30% 7%SXPP Basic res. 50% 11%SXDP Health care 24% 11%SXMP Media 27% 12%SXOP Construction 39% 13%SXKP Telcos 32% 14%SXEP Oil & Gas 42% 21%SX7P Banks 47% 23%SX3P Food & bev 31% 25%SX8P Tech 35% 35%Source: BofA Merrill Lynch Global Research. 3m correlations calculated using daily Euro returns andcurrent weights. Data from 16-Mar-07 to 16-Jun-17.SX7E implied-realised correlation near 5 year high, driven by stock-level divergenceSX7E 6m implied correlation has fallen since Mar-17 but the implied-realised correlationspread remains in the 88 th 5 year percentile (Chart 19). Notably, the low SX7E 6mrealised correlation in 2017 was mostly driven by company-specific rather than regionspecificdivergence (Chart 20).12 Global Equity Volatility Insights | 20 June 2017Chart 19: The SX7E 6m implied-realised correlation spread has beenhigh throughout 2017 and remains in the 88 th 5-year percentile100%80%60%40%20%0%-20%Jun-12Dec-126m implied correlationimplied-realised spreadJun-13Dec-13Jun-14Source: BofA Merrill Lynch Global Research. Data: 16-Jan-12 to 16-Jun-17. Implied and realisedcorrelations are calculated using current weights.Dec-14Jun-156m realised correlationDec-1555th percentile8th percentile88th percentileJun-16Dec-16Chart 20: The decline in SX7E 6M realised correlation appears to bemainly due to company-specific rather than region-specific divergence90%70%50%30%'12 '13 '14 '15 '16 '17Spread (rhs)Average inter-regional SX7E 6M realised correlation**SX7E 6M realised correl*50%40%30%20%10%Source: BofA Merrill Lynch Global Research. Data: 16-Jan-12 to 16-Jun-17. *Calculated based oncurrent weights of French, German, Italian and Spanish banks with enough price history. **Weconstruct theoretical portfolios consisting of SX7E names from a given country (France, Germany,Italy and Spain) and compute the average pairwise correlation of their daily returns0%Chart 21: ESTX50 3M put skew is near 5yr highs, in stark contrast toSXEP (European Oil & Gas equity) put skew which is close to 5yr lows6.5%5.5%4.5%100th percentileESTX50 put 3M 90-100 (%fwd) put skew has re-steepened tonear 5 year highs following the flattening which ensued afterthe first round of the French presidential elections (23-Apr). Therecent ESTX50 skew dynamics are in stark contrast to what hasbeen witnessed in the SXEP (European Oil & Gas equity), wherethe 3M 90-100 volatility spread has been trending lower and iscurrently near-flattest in 5 years.3.5%2.5%2nd percentile1.5%Jun12 Jun13 Jun14 Jun15 Jun16 Jun17SX5E 3M 90-100 put skew SXEP 3M 90-100 put skewSource: BofA Merrill Lynch Global Research. Data: 16-Jun-12 to 16-Jun-17.Global Equity Volatility Insights | 20 June 2017 13Chart 22: May has typically been the month with the least amount ofESTX50 realised volatility. This has also been true in 2017 thus far12% '07 to '17'87 to '9710% '97 to '07Overall trend ('87 to '17)2017 YTD8%Average ESTX50 realised vol vs. May6%4%2%0%-2%Jan Feb Mar Apr May JunJul Aug Sep Oct Nov DecThe overall seasonality in ESTX50 realised volatility since 1987(ESTX50 inception) has been one of relatively lower vol duringthe summer months vs. autumn. In particular, May stands out asthe lowest vol month across most 10 year horizons, and thisalso appears to be the case so far this year. We note that Apr-17 vol stands out mainly due to the 4% ESTX50 move on theMonday following the first round of the French presidentialelections.Source: BofA Merrill Lynch Global Research. Data: 1-Jan-87 to 16-Jun-17.Chart 23: ESTX50 1M 100-110 call skew is near-flattest since 200812%SX5E 1M 100-110 (%fwd) call skew Current10%8%ESTX50 short-dated (1M) 100-110 (%fwd) call skew hasflattened considerably since pre-French election (23-Apr) levelsand currently stands near 9 year+ lows. Consequently, limitedupside structures (e.g., call spreads) price attractively both froman ATMf volatility and skew basis.6%4%2%0%-2%'08 '09 '10 '11 '12 '13 '14 '15 '16 '17Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17.Table 4: Volatility measures of major equity indices in the EMEA region (data as of 16-Jun-17)3Mth ATM implied volatility 10D realised volatility 12Mth–3Mth ATM i-vol spread 3Mth 90-110 skewEquityindexWeeklyWeeklyWeeklyWeeklyWeeklyCurrent change 2Yr percentile Current change 2Yr percentile Current change 2Yr percentile Current change 2Yr percentile returnESTX50 13.4% 0.3% 2% 9.6% 2.0% 17% 3.4% -0.2% 99% 8.4% 0.9% 72% -1.2%FTSE 10.0% -0.4% 1% 8.6% 1.1% 24% 3.6% 0.2% 100% 6.2% 0.2% 9% -0.8%DAX 12.6% 0.3% 1% 12.7% 2.9% 29% 3.9% -0.2% 100% 8.5% 0.7% 67% -0.5%CAC 13.3% 0.3% 3% 10.3% 2.0% 21% 2.6% -0.1% 100% 8.6% 1.2% 77% -0.7%SMI 11.4% -0.1% 3% 12.2% 3.3% 44% 2.4% -0.1% 96% 6.5% 0.1% 27% 1.3%RDXUSD 25.9% 0.9% 29% 16.2% -1.2% 17% 0.9% -0.4% 58% 5.2% 0.4% 27% -3.7%TOP40 16.9% 1.3% 17% 10.6% 0.2% 15% 1.7% -0.5% 47% 8.0% 0.4% 36% -3.0%ISE30 20.2% 0.4% 6% 10.1% -1.4% 5% 3.1% -0.3% 81% 6.9% 0.1% 74% -0.8%Source: BofA Merrill Lynch Global Research14 Global Equity Volatility Insights | 20 June 2017European volatility: Sector snapshotTable 5: Volatility measures and indicative option prices for major European sector indices (data as of 16-Jun-17)Bearish <<<< --------------------------------------------------- >>>> Bullish3Mth ATMf impliedvolatility Real vol* 3Mth 95%-85% put spread** 3Mth 100%-110% call spread**3Mth 90%-110% riskreversal**EquityindexCurrentCurrentCurrentCurrentWeeklychange2Yr%-ile Currentprice(% ofspot)Weeklychange(bps)2Yr%-ileMaxpayoutratioprice(% ofspot)Weeklychange(bps)2Yr%-ileMaxpayoutratioprice***(% ofspot)Weeklychange(bps)2Yr%-ileWeeklyreturnSX3P (Fd&Bv) 10.7% -0.4% 2% 10.1% 0.6% -5 2% 16.4 2.1% -8 7% 4.8 -0.2% 5 80% 1.3%SX6P (Utils) 12.2% 0.0% 4% 10.9% 0.8% 2 4% 12.8 2.4% 1 5% 4.2 -0.3% 0 95% -0.1%SX7E (Banks) 22.7% 0.3% 2% 18.6% 1.9% 2 3% 5.4 3.6% 2 9% 2.8 -0.5% 0 52% -3.0%SX7P (Banks) 18.5% -1.2% 2% 13.1% 1.5% -10 3% 6.8 3.2% -15 5% 3.2 -0.4% 10 86% -1.9%SXAP (Auto) 16.7% -1.2% 1% 11.7% 1.3% -12 1% 7.8 3.0% -13 1% 3.3 -0.4% 6 68% -0.7%SXDP (Health) 13.0% -0.8% 1% 8.7% 0.9% -9 2% 11.5 2.5% -12 3% 4.0 -0.3% 4 71% 0.0%SXEP (Oil&Gas) 15.4% 0.0% 3% 11.8% 1.2% 0 3% 8.5 2.8% 2 2% 3.6 -0.2% -2 97% -1.3%SXIP (Insur) 14.0% -0.9% 1% 9.4% 1.0% -10 1% 10.0 2.7% -11 1% 3.7 -0.4% 6 83% 1.0%SXKP (Telecom) 15.4% 0.3% 3% 11.1% 1.1% 3 3% 8.8 2.8% 5 5% 3.6 -0.3% -3 83% -1.3%SXNP (Indust) 16.3% 0.1% 13% 10.9% 1.2% 1 23% 8.1 2.8% 1 10% 3.6 0.0% 0 100% -0.3%SXPP (Basic) 23.8% -0.7% 3% 17.8% 2.0% -7 3% 5.1 3.5% 0 4% 2.9 -0.3% -7 53% -4.8%SXQP (Prsnl&HH Gds) 10.2% 0.0% 1% 7.2% 0.5% -1 2% 18.5 2.0% -1 1% 4.9 -0.3% 1 76% 0.3%SXRP (Retail) 13.2% 0.4% 10% 12.8% 0.9% 8 10% 11.3 2.5% 14 10% 4.0 -0.1% -10 78% -3.3%SXTP (Trvl&Lsre) 14.4% 0.0% 7% 11.6% 1.0% 1 7% 9.9 2.7% 0 8% 3.7 -0.3% 1 41% 0.5%Source: BofA Merrill Lynch Global Research *Real vol = EWMA (Exponentially Weighted Moving Average) volatility, which measures historical price volatility but assigns greater importance to recent returns. Sigma(t)^2 =0.94*Sigma(t-1)^2+(1-0.94)*r(t)^2, where r(t) is the return on day t. **Indicative mid prices; strikes as % of forward ***Negative values indicate that the bullish risk reversal takes in a credit.Global Equity Volatility Insights | 20 June 2017 15Volatility in AsiaLong HSCEI-SPX volatility spread via corridor varianceGlobal synchronized monetary tightening is positive for EM volEmerging markets have been the biggest beneficiaries of the central bank-fueledabundance of liquidity. However, we think the tide may be turning as last week, the Fed,ECB, and BOE all delivered policy announcements with hawkish tones. How far theyreally go to tighten policy when economic data is weakening still remains unknown.However, we think the uncertainty surrounding tightening will be more positive for EMvolatility than for DM volatility.Chinese banks: Rapid increase in leverage is a big concernThe HSCEI currently has a 70% weight in the financial sector. Recently, BofAML analystWinnie Wu turned very bearish on the sector as (1) leverage has rapidly increased—debtto GDP rose by 18% in 2016 and may go above 300% by 2019, (2) shadow banking hasbecome too big, too complicated, and too levered to easily regulate—even at thehighest quality bank, China Merchants, off-balance sheet wealth management products(WMP) have grown to 40% the size of on-balance sheet assets from just 18% two yearsago, and (3) excessive home price inflation—low and middle-income households are lateto the party and a correction in prices could have a systemic effect as property assetshave been used as collateral in WMPs.SPX: The Fed is now “collaring” the marketSince the global financial crisis the Fed has been well known for providing a put optionby its willingness to step in during periods of market stress. However, post the Fedmeeting last week, it appears the central bank has decided to cap its monetary supportas some FOMC members seem worried that financial conditions are too loose.Effectively, the market is now “collared” (more so for the SPX compared to EM) as thedownside is protected by the Fed put (though with a lower strike price) while the upsideis capped by log-jammed fiscal policy and positioning, where the risk of quant fundsselling record equity positions meets cashed-up investors still accustomed to buyingthe-dip.The depressed implied China vs. US risks should reverseWith the steep drop in global risk premium, the HSCEI-SPX 18-month variance swapspread has fallen back to the lower-end of its 5-year trading range. Since we believe theglobal synchronized monetary tightening will impact HSCEI volatility more than SPXvolatility, we recommend owning HSCEI-SPX 70/110% corridor variance at 5 vol points,a 3 vol point discount to vanilla variance spreads. Investors will be exposed to therealized vol spread between HSCEI and SPX as long as HSCEI stays within 70-110% ofits initial level. Pricing of corridor variance is cheaper than vanilla variance as investorscan avoid paying for the rich HSCEI convexity below the 70% barrier. The trade has apositive carry and benefits during China risk-off events.Note that the potential HSCEI index enhancement will reduce the financial weightings inHSCEI from 70% to 50% and lower realized volatility by 1.8 vol points. However, theenhancement will be implemented in stages. It will probably start in Dec-17 at theearliest and will not be fully implemented by the end of 2018, in our view.Indicative pricing (As of 19-Jun-17)Buy HSCEI-SPX Dec-18 70/110% corridor variance swap: 5 vol points16 Global Equity Volatility Insights | 20 June 2017Chart 24: The HSCEI-SPX Dec-18 (18-month) variance swap spread isback to the lower-end of its 5-year trading range20%18%16%14%12%10%8%6%4%2%0%Jan-12May-12Sep-12Jan-13May-13Sep-13Jan-14May-14Sep-14Jan-15May-15Source: BofA Merrill Lynch Global Research Data as of 2-Jan-12 to 16-Jun-1718-month constant maturity variance swap spread is used as a proxy of Dec18 variance swap spreadSep-15Jan-16May-16Dec18 HSCEI SPX Variance SpreadSep-16Jan-17May-17Chart 25: The long term HSCEI-SPX realized vol spread has been higherthan the current implied corridor variance spread (5%) 98% of the timesince 200730%25%20%15%10%5%0%Jul-07Feb-08Sep-08Apr-09Nov-09Jun-10Jan-11Aug-11Mar-12Oct-12May-13Dec-13Jul-14Feb-15Sep-15Apr-16Nov-16Jun-17Source: BofA Merrill Lynch Global ResearchHSCEI - SPX 18-month realized volDec18 Variance Implied: 8%Dec18 70/110% Corridor Variance Implied: 5%Data as of 2-Jul-07 to 16-Jun-17Chart 26: Historical payoff of buying HSCEI-SPX Dec-18 70/110%corridor variance spread; higher payoffs during 2011-2012 and 2015sell-offs300,000250,000200,000150,000100,00050,000--50,000Jul-07Jul-08Jul-09Jul-10Jul-11Jul-12Jul-13Jul-14Jul-15Jul-16Table 6: The HSCEI-SPX Dec-18 70/110% corridor variance tradehas a positive carry with realized vol across most tenors higherthan the current implied corridor variance swap spreadHSCEI SPX Spread1M realized vol 12.1% 4.6% 7.5%3M realized vol 13.7% 6.8% 6.9%6M realized vol 14.0% 6.8% 7.2%12M realized vol 16.6% 9.7% 6.9%18M realized vol 20.8% 11.99% 8.8%HSCEI – SPX Dec18 70/110% corridor variance offer: 5.0%Source: BofA Merrill Lynch Global ResearchHSCEI-SPX Dec18 70/110% corridor historical payoff (10kvega)Source: BofA Merrill Lynch Global ResearchData as of 2-Jul-07 to 16-Jun-17Global Equity Volatility Insights | 20 June 2017 17Notable trends and dislocations (Asia)Most regions in Asia reported modest declines last week, led by Hong Kong’s HSCEI,which lost 2.0% week-over-week. Much of the decline came on Thursday following theUS Fed’s decision to hike rates 25bps. Also in China, the People’s Bank of China (PBOC)injected 410bn yuan (about $60bn) into the financial system via reverse-repos, thelargest cash boost since January. The central bank said the funds are meant to easeconcern amid a seasonal funding squeeze. The biggest contributors to the index’s losswere financials names, including China Life Insurance (2628 HK), which fell 5.7%, PingAn Insurance Group Co of China Ltd (2318 HK), which dropped 3.7%, Bank of China Ltd(3988 HK), which declined 1.8%, and China Merchants Bank Co Ltd (3968 HK), which fell5.7%. We saw a similar decline from Hong Kong’s HSI index, which lost 1.6% percentlast week.After the HSCEI and HSI, last week’s biggest losers were Korea’s KOSPI and India’sNIFTY, which each returned -0.8% week-over-week. In Japan, the Nikkei fell 0.3%. OnFriday, the Bank of Japan (BoJ) left its monetary policy unchanged—it will continue tocontrol the yield curve via its negative benchmark rate and its asset purchasing program.The final region to report a loss last week was Taiwan’s TWSE, which lost 0.4%.On the other hand, the only region to see a gain last week was Australia, which saw itsASX 200 benchmark increase 1.7% week-over-week. The biggest contributors to thegain were Commonwealth Bank of Australia (CBA AU), which gained 3.4%, WestpacBanking Corp (WBC AU), which increased 1.9%, and CSL Ltd (CSL AU), which added2.9%.10 day realized vol picked up in Asia last week, up 2.0 vol points to 9.6%• Asian 3m ATM volatility declined on average 0.1 vol point to 12.3% last week, while10 day realized vol increased on average 2.0 vol points to 9.6%. Notably, the HSI'srealized vol increased 5.4 vol points, the biggest increase in the region. On theother hand, the NKY was the only index to see a decline in 10 day realized vol—itdropped 4.3 vol points week-over-week to 7.2%.• On average, term structures among Asian indices steepened by 0.2 vol points to4.2% last week. The TWSE 12M-1M term structure steepened the most, increasing1.0 vol point to 2.9%. On the other hand, Hong Kong’s HSI saw the only flatteningas its term structure flattened 0.1 vol point to 4.9%.• Asian 3M 90-110% skews widened 0.5 vol points on average to 3.8%. Taiwan’sTWSE widened the most, increasing 2.3 vol points to -0.2%.Table 7: Volatility measures of major Asian indices (data as of 16-Jun-17)3Mth ATM Implied Volatility 10D Realized Volatility 12Mth-1Mth ATM Vol Spread 3Mth 90-110 Skew Spread Equity MarketWeekly 4Yr Weekly 4Yr Weekly 4Yr Weekly 4Yr WeeklyCurrent change percentile Current change percentile Current change percentile Current change percentile returnHSI 12.4% 0.2% 2.1% 10.2% 5.4% 20.6% 4.9% -0.1% 97.8% 3.3% 0.9% 41.4% -1.6%HSCEI 15.0% -0.4% 0.0% 10.7% 4.8% 7.8% 5.4% 0.2% 98.1% 1.4% 0.5% 36.5% -2.0%NKY 13.8% -0.2% 0.1% 7.2% -4.3% 1.8% 5.8% 0.5% 99.9% 5.8% 0.0% 73.9% -0.3%KOSPI 200 12.2% 0.2% 19.7% 11.1% 1.1% 53.1% 4.0% 0.2% 77.0% 3.8% 0.3% 43.7% -0.8%ASX 200 11.8% -0.2% 17.7% 15.7% 5.1% 77.1% 2.7% 0.0% 59.5% 6.4% -0.1% 22.5% 1.7%NIFTY 10.7% 0.2% 2.2% 4.8% 1.0% 0.4% 4.0% 0.0% 76.1% 5.9% -0.1% 64.1% -0.8%TWSE 10.5% -0.6% 7.2% 7.8% 1.0% 20.3% 2.9% 1.0% 71.2% -0.2% 2.3% 3.9% -0.4%Source: BofA Merrill Lynch Global Research18 Global Equity Volatility Insights | 20 June 2017Chart 27: Both HSCEI and NKY term structures are near record steeps;we favor calendar puts to hedge downside risks15%10%5%0%-5%Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12NKY 3M-12M ATM VolJan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16HSCEI 3M-12M ATM VolJan-17Calendar puts are attractively priced given the steep termstructureWith the continuous low realized volatility environment, bothNKY and HSCEI 3-month minus 12-month term structuressteepened to -3.7 vol points, which are near multi-year lows.As our strategists think the Fed now appears concerned aboutsurging asset prices, investors should consider downsidehedges. Calendar puts, i.e. buying short-dated ATM puts andselling long-dated OTM puts, are attractively priced given thesteep term structure.Currently, we still have an open trade on NKY calendar puts (buyJul-17 19,500 puts vs sell Dec-17 17,500 puts) to hedgedownside risks.Source: BofA Merrill Lynch Global ResearchData as of 2-Jan-09 to 16-Jun-17Chart 28: The Nikkei/Topix ratio and its volatility is capped with theBoJ’s ongoing yield curve controlNKY / TPX Price Ratio12.912.712.512.312.111.911.711.5Jan-12Jun-12Nov-12Apr-13Sep-13Feb-14Jul-14Dec-14May-15Oct-15Mar-16Aug-16Jan-17Jun-17NKY/TPX Ratio10Y JGB Yield-0.6-0.4-0.200.20.40.60.811.2JGB 10-year yield (Inverted)The BoJ’s ongoing yield curve control has capped theNikkei/Topix ratio and its volatilityJapanese government bond (JGB) yield has been on a downwardtrend over the last few years and has negatively impacted bankearnings. As the Topix has higher weightings in banks than theNikkei, the NKY/TPX ratio has been grinding higher.However, the NKY/TPX ratio appears to have flattened out sincethe BoJ’s commitment to maintain the 10-year JGB yield ataround 0% in September 2016. With global central banksincreasingly advocating tighter monetary policies, the marketmay start to speculate BoJ’s exit strategy and this may reverseNKY/TPX’s upward trend. With TPX vol trading below NKY vol,buying TPX calls funded by NKY calls may perform well in such ascenario.Source: BofA Merrill Lynch Global ResearchData from 2-Jan-12 to 16-Jun-17AS51 3M ATM IV over HSCEI is at its 4-year highTable 4 lists Asian index pairs with the highest IV ratio vs their 4-year histories. Forinstance, the ratio of AS51 3M ATM IV over HSCEI is at its 4-year high.Global Equity Volatility Insights | 20 June 2017 19Chart 29: The ratio of AS51 3M ATM IV over HSCEI is at its 4-yr high(Daily data from 1-Oct-12 through 16-Jun-17)Implied Vol45%40%35%30%25%20%15%10%5%Jan-13AS51 3M ATM vol HSCEI ATM vol Vol ratioMay-13Sep-13Jan-14May-14Sep-14Jan-15May-15Sep-15Jan-16May-16Sep-16Jan-17May-170.900.800.700.600.500.40RatioTable 8: Index pairs^ with the highest implied vol ratio vs their histories(data as of 16-Jun-17)Index A Index B A/B ImpliedRatio 4-yrpercentile(Implied vol) (Implied Vol) Vol ratio3M ATM AS51 (11.8%) HSCEI (15.0%) 0.79 100%6M ATM KOSPI2 (13.2%) HSCEI (17.1%) 0.77 98%12M ATM KOSPI2 (14.6%) NIFTY (14.0%) 1.04 98%3M 25d-Put AS51 (13.8%) HSCEI (16.3%) 0.85 99%6M 25d-Put KOSPI2 (14.4%) HSCEI (18.7%) 0.77 98%12M 25d-Put KOSPI2 (16.0%) HSCEI (20.5%) 0.78 99%3M 25d-Call AS51 (10.9%) HSCEI (15.0%) 0.73 99%6M 25d-Call KOSPI2 (12.8%) NKY (14.4%) 0.89 98%12M 25d-Call KOSPI2 (14.2%) NIFTY (12.2%) 1.16 98%Source: BofA Merrill Lynch Global Research^ Index universe includes the ASX200, HSCEI, HSI, KOSPI2, NIFTY, NKY, TWSE, SPX and SX5E* mid level implied volSource: BofA Merrill Lynch Global Research20 Global Equity Volatility Insights | 20 June 2017Summary of Open Trades (19-Jun-17)Price data for open level reflects the price on open date and does not necessarily reflectthe price at which the trade could be executed at the date of this report. Our trades arestructured to be executed on the open date and are not necessarily appropriate toexecute as formulated beyond that date.Table 9: Summary of open trades as of 19-Jun-17Trade DescriptionOpenDateOpenLevelLong SX5E vs short SPX Dec18 var swap 5-Jul-16 6.1 volsLong NKY vs short SPX Dec18 var swap 5-Jul-16 5.7 volsLong SX5E vs short SPX Dec18 put vs put 5-Jul-16 0.00%ExpectedTrade TermDec-18 expiryRationaleInvestors should re-assess attractiveness of popular and (typically) technically motivated longerdatedRV vol trades, given environment of structurally higher political & economic risks andincreasingly limited policy optionsBuy a 1Y ATM worst-of call on SPX & TLT 18-Jul-16 0.9% 1 year Cheap equity upside in a bond / equity melt-upBuy SPX>UKX Jun17 ATM outperformance call, conditioned on SPX lowerat maturity (qUSD)Buy UKX Jun17 6650 put, sell SPX Jun17 1850 putBuy an SX5E Sep-17 95% put conditional on EUR 10Y CMS > 1.1% or <0.3% in Mar-1717-Oct-1617-Oct-162.0%2.6%Jun-17 expiryJun-17 expiryRisks of a hard Brexit rising and (weak) currency tailwind likely to prove short-lived; positioncheaply for FTSE 100 (UKX) underperformance14-Nov-16 2.7% Sep-17 expiry Remain long equities and cheapen hedges by conditioning on ratesBuy 2823 HK Jun-17 90/110 strangle 21-Nov-16 5.55% Jun-17 expiry China risk premium rising but A-shares vol still at all-time lowsBuy ESTX50 Dec17 90% put contingent on EURGBP < 0.82 by Jun17 expiry 2-Dec-16 1.63% Dec-17 expiryBuy SPX>UKX Jun17 5% outperformance call (qUSD) 2-Dec-16 2.05% Jun-17 expiryLong XLF vs SX7E Jun17 ATM outperf call, contingent on SX7E higher atJun expiry (qEUR)2-Dec-16 1.20% Jun-17 expiryEquity-FX correlation is not priced for a spillover of populism into the EU, which could cause EURto fall against an already weakened GBP as equities fallUKX is heavily exposed to EU (50% revenues) and should underperform SPX if GBP tailwindfades. Volatility & correlation suit well for outperformanceCheapen long XLF upside to near 8y lows via selling upside on structurally challenged Europeanbanks & relatively more bearish outlook for US rates vs EUBuy NKY Jun17 110% Call 02-Dec-16 1.83% Jun-17 expiry USDJPY and NKY the biggest beneficiaries of a Trump winBuy TPINSU Jun17 110-125% Call Spread 02-Dec-16 3.30% Jun-17 expiry Banks and Insurance are the most leveraged sectorBuy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% Jun-17 expiry Banks and Insurance are the most leveraged sectorBuy 2823 HK Jun17 90/110% strangle 02-Dec-16 5.90% Jun-17 expiry China risk premium rising but A-shares vol still at all-time lowsBuy HSCEI Jun17 105-120% call spread contingent on $KRW >1200 02-Dec-16 1.20% Jun-17 expiry Own contrarian EM upside at low cost & limited riskBuy NKY-SPX Dec19 70/110% corridor variance 02-Dec-16 1.50% Dec-19 expiry QE uncertainty and USDJPY vol support NKY vs SPX realized volBuy NKY Jun17-Jun18 18,500 strike FVA 02-Dec-16 21.5% Jun-17 expiry What if QE hits its limit? Long NKY vol outright which is cheap to carryLong Russell 2000 vs. short S&P 500 Dec-18 var spread 5-Dec-16 3.9pts Dec-18 expiryWith fiscal stimulus and potential tax cuts, small caps revert to old normal generating higher volon upside and downside relative to large capsBuy 1x Jun17 64 call on Aug17 Brent futures, sell 1x SXEP Jun17 330 call 9-Jan-17 1.00% Jun-17 expiryVol and price technicals are attractive. BofAML commodity strategists oil target is $70/bbl but thisis already priced in SXEP levels according to BofAML Oil & Gas equity analystsBuy SPX 6m ATM call contingent on GLD 5% higher in 3m 23-Jan-17 1% Jul-17 expiry Position for a near-term wobble followed by yet another equity melt upLong NKY - SPX Dec-18 corridor var replication 13-Feb-17 4.00% Dec-18 expiry Cheaply access positive carry QE failure hedgeBuy NDX Top20 volatility dispersion 27-Feb-17 17.0% Jan-18 expiryLong 1.8x vega on 1y single stock vols of UK Brexit exposed names,Short 1x vega on 1y FTSE index vol14-Mar-17 32.3vols 14-Mar-18Position for a pick-up in single stock realised vol on the 10 names (within FTSE’s top 30) wherepost EU referendum realised vol was the highest relative to current 1y ATMf vol. The 10 namesare: Barclays, Aviva, Prudential, BT, Glencore, Tesco, CRH, BA, Standard Chartered & HSBC.SPX Sep-17 95% puts conditional on the 5yr CMS rate above 2.4% atmaturity14-Mar-17 1% Sep-17, expiry Hedge portfolios against a buy-the-dip failure should a faster rate cycle ultimately jeopardize itBuy Buy-Rated MSCI A-shares stocks & hedge with puts 23-Mar-17 1.44% Jun-17 expiry Market may trade on the MSCI inclusion theme; Hedge with 2823 HK Jun17 95% putBuy A-shares with highest MSCI impact & hedge with put 23-Mar-17 1.44% Jun-17 expiry Market may trade on the MSCI inclusion theme; Hedge with 2823 HK Jun17 95% putOwn Japan stock vol via gamma weighted vol dispersion 10-Apr-17 15.8% Mar18 expiry Historically attractive to own TOPIX Top 10 corridor gamma weighted volatility dispersionBuy CNOOC Jul-17 95% puts vs. sell HSCEI 95% puts 24-Apr-17 0.77% Jul17 expiry Hedge a rollover in China GDP and screen for cyclicals that could face pressureBuy CH Merchant Bk Jul-17 18.5/17 put spread vs 22 call 24-Apr-17 0.10% Jul17 expiry Hedge a rollover in China GDP and screen for cyclicals that could face pressureBuy SX5E Dec17 3800 calls contingent on EURUSD > 1.1 at expiry 8-May-17 1.3% Dec17 expiry Benefit from low vol, flat correl, likely hawkish ECB & (FX un-hedged) inflows into EU equitiesBuy 1.5x KOSPI2 285 puts vs. short 1x $KRW 1160 call 8-May-17 0.3% Jul17 expiry Leverage inexpensive equity vs. FX vols to own cheap tail protectionBuy EEM Aug17 39.5 put and sell EEM Aug17 37 put 15-May-17 1.6% Aug17, expiry Buy inexpensive EM equity puts on near-record performance gap to commoditiesBuy Dec17 105% call on an equally weighted basket of SX7E, SXAP, SXPP& SXEP, sell Dec17 ATM worst-of call on the same15-May-17 1.6% Dec17 expiryMonetise low vol & high implied correl to position for greater sector dispersion in EU: long basketcall, short worst-of callBuy NKY Jul-17 19500 puts vs. short Dec-17 17500 puts 15-May-17 0.0% Jul17 expiry Own inexpensive NKY hedges into FOMC; Term structure is too steep is under-pricing risksShort GILD $55-$62.5-$67.5 put spread collar 16-May-17 1.5% Sep-17 expiry Buy out-of-favour and inexpensive biotech upside by levering depressed vol & skewLong 1x EEM 3m 97.5% put vs. short ~0.09x units each of 3m 97.5% puts onFXI, EWY, EWZ, EPI, EWT, RSX, EZA, and EWW1.5% 0.0% 3m Buy EEM puts financed by a basket of EM puts to lever near record low correlBuy Tencent Jul17 250/300 strangle 22-May-17 2.45% Jul-17 expiry Hedge a potential China tech bubble; Tencent potentially volatile after a 45% rally YTDBuy A-shares (2823 HK) Jul17 105% call 22-May-17 1.15% Jul-17 expiry Hedge the upside into MSCI announcement on 20-JunBuy 1x contract of ESTX50 Jun17 3525, sell 4x contracts of V2X Aug future 22-May-17 1.00%Buy SX5E Dec17 3450-3700 bullish risk reversal vs short IBOXX HY TRSwith equal notional sizing30-May-17 1.17%Jun-17 expiryDec-17 expiryFundamental case to be long EU equities remains intact but stretched bullish positioning couldlead to near-term consolidationBofAML Equity & Credit strategists highlight they favour equities over HY credit as div yields havesurpassed HY credit yield & equities offer more gearing to rising PMI’s, earnings and FCFGlobal Equity Volatility Insights | 20 June 2017 21Table 9: Summary of open trades as of 19-Jun-17Trade DescriptionBuy 6m ATM calls on FB, AMZN, NFLX and GOOGLOpenDateOpenLevel6.9%(FB),7.2%(AMZN),30-May-179.4%(NFLX),6.2%(GOOGL)ExpectedTrade Term6mRationaleStock replace FANG stocksBuy a 6m outperformance call on FANG stocks vs. SPX conditional on SPX>30-May-17 3.4% 6m Lever extremely depressed FANG volatility and low correlation to buy upsidecurrent levels at expiryBuy HSI Sep17 90% put, sell ASX200 Sep-17 90% put 30-May-17 0.15% Sep-17 expiry HSI is unlikely to outperform if AS51 drops more than 10%; HSI vol below AS51 volBuy 14-Sep-17 best-of 95% put on NKY/KOSPI2/HSI 05-Jun-17 0.80% Sep-17 expiry Buy best-of puts to hedge a reversal in rally with the low vol and correlation environmentBuy SPX Top50 volatility dispersion 05-Jun-17 16.6% Jun-18 expiry Position for a potential bubble in TechBuy XLF 24 call, sell QQQ 139 call 12-Jun-17 0.01% Jul-17 expiry Rotate out of Growth into ValueBuy NKY-KOSPI2 Dec-17 90/110 strangle spreads 12-Jun-17 3.50% Dec-17 expiry We think the technically depressed NKY-KOSPI2 volatility spread will normalizeBuy NKY Sep17 19000-17500 put spread 12-Jun-17 0.93% Sep-17 expiry NKY put spread may offer even better value in hedging against a "mini TARP moment"Source: BofA Merrill Lynch Global Research. Prices reflective of most recently available data which may be delayed in some cases. “Trade Value” represents current valuation of trades initiated on the “Open Date”.22 Global Equity Volatility Insights | 20 June 2017Summary of Closed Trades (19-Jun-17)Table 10: Summary of closed trades as of 19-Jun-17Open Open CloseTrade DescriptionDate Level Level Close Date RationaleBuy NKY Aug-16 105%-110% call spreads & sell 90% puts 11-Jul-16 0.26% 1.73% 25-Jul-16 Close position as the hurdle to surprise on the upside is high following a 5.8% NKY rallyReplace FB long positions via Oct-16 ATM calls 25-Jul-16 5.9% 6.1% 1-Aug-16 Close position as Facebook rallied on better-than expected Q2 resultsReplace AMZN long positions via Oct-16 ATM calls 25-Jul-16 5.5% 6.3% 1-Aug-16 Close position as Amazon rallied on better-than expected Q2 resultsBuy AAPL Oct-16 ATM protective puts 25-Jul-16 4.6% 1.2% 1-Aug-16 Remove protection as worries around disappointing Q4 guidance faded post earningsBuy 1.5x 5-Aug-16 2950-3000 strangles by selling 1x 19-Aug-16 2950-3000 strangles25-Jul-16 0.00% -1.12% 5-Aug-16 The BoJ, Fed & EU bank stress tests could move mkts sharply in the near termSell NKY Aug16 15500 puts, Buy Sep16 15500-14500 putspreads25-Jul-16 0.24% 0.28%Aug-16 expiry &Sep-16 expiryUnwinding before the Aug16 expiry; The NKY Sep put spread has carried wellBuy TLS 25-Aug16 95% puts 18-Jul-16 1.05% 2.95% 15-Aug-16 Telstra has announced earnings and the stock has corrected 5% over the periodBuy Newcrest 25-Aug-16 105/115% call spreads 18-Jul-16 2.64% 1.18% 15-Aug-16 NCM has stayed unchanged over the period despite better than expected earningsBuy CSL 25-Aug-16 95% puts 18-Jul-16 1.09% 1.18% 22-Aug-16 CSL fell 5.4% over the period with weak earnings announcementBuy BHP 25-Aug-16 105/115% call spreads 18-Jul-16 2.22% 0.77% 22-Aug-16 BHP rose 3.6% over the period but the option remains out of the moneyBuy HSCEI Aug16 9400 call, Short Oct16 10000 call 1-Aug-16 0.00% 0.67% 22-Aug-16 Close position as the HSCEI rallies 5.2% and we are approaching the Aug16 expiryBuy Tencent (700 HK) Sep16 105% call 15-Aug-16 1.70% 2.70% 22-Aug-16 Tencent jumped post better than expected earningsSell 1x SX7E 1M 25d call to fully finance 1.85x SX5E 1M25d calls25-Jul-16 0.0% 0.0% 25-Aug-16 SX7E 1M 25d call / SX5E 1M 25d call price ratio is in the 100 th 2-yr percentileBuy CMB (3968 HK) Sep16 105-115% call spread 5-Jul-16 2.32% 6.12% 30-Aug-16 Close position and BofA ML turned neutral in EM in the short-termBuy ICBC (1398 HK) Sep16 105-115% call spread 5-Jul-16 2.12% 9.0% 30-Aug-16 Close position and BofA ML turned neutral in EM in the short-termBuy BOC (3988 HK) Sep16 105-115% call spread 5-Jul-16 2.10% 6.28% 30-Aug-16 Close position and BofA ML turned neutral in EM in the short-termBuy XLF Sep 24 strike call 25-Jul-16 1.4% 2.3% 6-Sep-16Buy XLU Sep 51 strike put 25-Jul-16 1.3% 2.6% 6-Sep-16Buy a 6M ATM worst-of {XLF call, XLU put} 25-Jul-16 1.35% 3.0% 6-Sep-16Buy 0.85x SX5E Sep16 3000-3100 strangle, sell 1x SX5EDec16 3000-3100 strangleClose positions from trades that have benefited thus far from the rally in Financials and weaknessin Utilities; monetize view that Fed will not hike in September15-Aug-16 -5.07% -5.73% Sep-16 expiry Take advantage of low near term vol and a steep term structureLong 0.5x V2X Oct16 future, short 0.5x V2X Jan-17 future11-Jul-16 0.05 vols -0.95 vols 19-Sep-16Unwind Oct/Jan spread and maintain Nov/Jan spread given clarity around the Italian referendumdateSell VSTOXX Sep 21 puts 30-Aug-16 1.20 vols 1.77 vols Sep-16 expiry Global macro event risk likely to keep V2X supported going into Sep expiryVIX Sep 17/22 1x2 call ratios (short 2x) + 0.75x SPY Sep2315-Aug-16210 puts$0.85 $0.45 Sep VIX expiry Trade provided hedging benefits during the sudden Sep market shock & has expiredBuy NKY Oct 95/105 strangle outright 30-Aug-16 2.28% 0.44% 27-Sep-16 Take a loss post an disappointing market reaction on the BoJ announcementBuy NKY Oct 95/105 strangle daily delta-hedging 30-Aug-16 2.28% 0.56% 27-Sep-16 Take a loss post an disappointing market reaction on the BoJ announcementLong 3M 25d EFA put vs short 3M 25d UKX put 5-Jul-16 0.00% 0.00% 3 months Trade expired on 3-OctReplace T long position via 3M ATM calls 19-Jul-16 2.72% 0.04% 3 monthsReplace LOW long position via 3M ATM calls 19-Jul-16 3.90% 0.00% 3 monthsReplace RTN long position via 3M ATM calls 19-Jul-16 3.16% 0.41% 3 monthsReplace CRM long position via 3M ATM calls 19-Jul-16 4.16% 0.19% 3 monthsReplace NEE long position via 3M ATM calls 19-Jul-16 2.32% 0.08% 3 monthsOverlay long WBA long position with 3M ATM calls 19-Jul-16 4.04% 1.20% 3 monthsOur analysts no longer expect impactful catalysts in the near term; stock replacement strategiesproved useful in cushioning downside losses during the abrupt Sep-16 sell-off vs. long equitypositions.Buy HKEx (388 HK) 1x2 105%-115% call ratio 15-Aug-16 0.60% 0.00% 29-Sep-16 HKEx failed to rally above the first call strike and expired worthlessBuy NKY Oct16 17500 call, Sell 0.65x NKY Sep 17250 call 8-Aug-16 0.70% 0% 14-Oct-16 NKY Oct-16 call expired out of the moneyClose position as the Oct VIX future stayed well-supported as is typically the case in the weeks1-Aug-16 $0.45 $0.88 14-Oct-16Short VIX Oct 15 put vs. long VIX Nov 19/26 call spreadleading up to the US presidential electionLong 2x SPX Oct31 2125 puts vs. short 1x SPX Mar-171975 put6-Sep-16 0.0% -0.34% 14-Oct-16Provided hedging benefits in the sudden equity shock in early Sep-16; now being unwound tomitigate decayDAX +2.31x Dec16 / -1x Dec17 put calendars 30-Aug16 0.00% -2.60% Dec-16 expiry DAX outperformance & low short dated DAX vol make put calendars attractiveBuy SX5E Dec16 2950/2750 put spread 6-Sep-16 1.48% 0.00% Dec-16 expiryA catalyst-strewn fall and a remarkably low volatility summer suggests that there could beheadwinds to continued market upside on low volatilityBuy 1.5x SX5E Dec16 3100 call, sell 1x SX5E Mar17 310024-Oct-16call for an upfront credit of 56bps-0.56% 1.62% Dec-16 expiry Monetise steep SX5E vol curve for tactical EU upside with an upfront creditBuy a 6M ATM worst-of call on XLP & GLD 11-Jul-16 1.05% 0.0% 6 monthsBuy a 6M ATM worst-of {SPX put, GLD call} 11-Jul-16 1.60% 0.0% 6 monthsBuy GLD 124/130 Dec-16 call spread 8-Nov-16 0.9% 0.0% Dec-16Buy GLD 116/124/130 Dec-16 call spread collar 8-Nov-16 0.65% -7.4% Dec-16Buy TLT 123/132/137 Dec-16 call spread collar 8-Nov-16 0.67% -5.03% Dec-16Buy Oct16 110%f calls on VIE FP, AI FP, IBE SQ, STAN LN 18-Jul-16and MUV2 GY2.37% 3.30% Oct-16 expiryBuy an Oct16 110%F call on an equally weighted basket(quanto EUR)18-Jul-16 0.81% 0.00% Oct-16 expiryTake a loss as safe-haven assets post a weak performance in H2-16 with fears over Trump’ssurprise victory easing and stock markets rallyingAdd exposure via inexpensive upside on single names where positioning appears particularlybearish and stocks have underperformed vs. their sectorsBuy 0.895x V2X Oct 21 puts, sell 1x VIX Oct 16 puts 19-Sep-16 0.0 $1.3 Oct-16 expiry Near term catalysts & curve differentials favour tactical long V2X, short VIX putsSell SX7E Dec16 115 call 6-Sep-16 -0.88% -1.09% 24-Oct-16Close short SX7E call (part of SX5E put spread, short SX7E call trade) to limit potential risk from a“Yes” in the Italian referendumGlobal Equity Volatility Insights | 20 June 2017 23Table 10: Summary of closed trades as of 19-Jun-17Open Open CloseTrade DescriptionDate Level Level Close Date RationaleBuy HSI Oct-16 102% call, Sell HSP 105% call 19-Sep-16 0.60% 0.00% 28-Oct-16 HSP has under-performed HSI by 1.8% but both options expire out-of-the moneyShort 1x USO 3M 25d put, long 2.1x SXEP 3M 25d call 8-Aug-16 0.00% 0.00% 4-Nov-16The number of long SXEP calls per short USO put is historically high. Leverage commodity andequity strategists' views on oil and the Oil & Gas sectorSell Dec16 SXDP 635 puts, buy 0.6x Dec16 SX7E 110 calls 7-Nov-16 0.00% 1.23% 11-Nov-16 Tactical option trade ahead of US electionsLong 0.5x V2X Nov16 future, short 0.5x V2X Jan-17 future 11-Jul-16 0.20 vols -1.19 vols Nov-16 expiry Hedge further Brexit fallout, Italian bank & referendum risk.Buy NIFTY Nov16 95/105 strangle outright 6-Sep-16 1.63% 6.36% 21-Nov-16 Close position as NIFTY has fallen 11.4% and we are approaching the expiryBuy H-shares w/ SZ-A & buy HSCEI Dec16 put 22-Aug-16 1.90% 8.72% 5-Dec-16 Close position as the Shenzhen HK connect has launched on 5-Dec-16Buy HK small-cap & buy HSCEI Dec16 put 22-Aug-16 1.90% 6.76% 5-Dec-16 Close position as the Shenzhen HK connect has launched on 5-Dec-16Buy 1.32x EFA US 3M 25d put, sell 1x SX5E 3M 25d put for22-Aug-16near 0 upfront premium0.04% 0.00% 22-Nov-16Buy 2.6x SX5E 3M 110% call, sell 1x SX5E 3M 90% put fornear 0 upfront premiumOwn EFA puts vs ESTX50 puts to benefit from any increase in quantitative failure risk in Japanand post-Brexit uncertainty22-Aug-16 -0.04% 0.00% 22-Nov-16 Low vol, high skew combo makes ESTX50 levered riskies attractiveSell 1M 95%f SX5E put and buy 1M 105%f SX5E call 31-Oct-16 -0.40% 0.00% 1-Dec-16 Generate income in range-bound markets, benefiting from high ESTX50 skewBuy KOSPI2 Dec16 95% put, sell $KRW 97.4% put 17-Oct-16 0.00% 0.00% 8-Dec-16 Both legs expire out-of-the money at expiryBuy HSCEI Dec16 95% put, sell 2822 HK 94.8% put 12-Sep-16 0.00% 0.00% 29-Dec-16 Both legs expire out-of-the moneyBuy HSCEI Dec-16 105-115% call spread 27-Sep-16 1.82% 0.00% 29-Dec-16 HSCEI call spread expires out-of-the moneyBuy CH Banks Dec-16 105-115% call spread 27-Sep-16 2.05% 0.00% 29-Dec-16 Chinese Banks call spread expires out-of-the moneyBuy Best-of TWSE,KOSPI2,HSCEI Dec16 95% put 10-Oct-16 0.90% 0.00% 29-Dec-16 The best performing index (KOSPI2) fell less than 5% over the periodBuy HSCEI Dec16 9800 call with a 10600 knock-out 7-Nov-16 1.00% 0.00% 29-Dec-16 HSCEI knock-out call expires out-of-the moneySell Samsung Jan17 90% put, buy KOSPI2 96% put 17-Oct-16 0.00% 0.00% 12-Jan-17 Both legs expire out-of-the money. The relative value trade has a zero profit & lossBuy an XOP Jan-17 45 call 22-Aug-16 1.4% 0.00% 20-Jan-17 Call expired out-of-the money at expiryBuy an XLE Jan-17 ATM call with 115% knock-in 22-Aug-16 2.5% 0.0% 20-Jan-17 Call expires in-the-money but the barrier was not breached at expiryBuy an XLE over SPX Jan-17 ATM outperformance callcontingent on SPX up at expiry22-Aug-16 2.3% 3.4% 20-Jan-17Energy equity outperformed the overall equity market while both were up by the time theoutperformance call expiredBuy XLP Jan-17 52 / 49 put spread 19-Sep-16 1.4% 0.00% Jan-17 expiry Both legs expire out-of-the moneyBuy a 6M ATM best-of put on SPX & TLT 18-Jul-16 0.8% 0.00% 6 months Put expired out-of-the money as the S&P500 endedBuy LLY Jan-17 80/90 1x2 CS 17-Oct-16 1.8% 0.00% Jan-17 expiry Both legs expire out-of-the moneyBuy LLY Jan-17 80/85 CS with 90 KI on upper leg 17-Oct-16 2.4% 0.00% Jan-17 expiry Both legs expire out-of-the moneyBuy ZTS Jan-17 46/50 bullish risk reversal 17-Oct-16 2.6% 7.4% Jan-17 expiry Both legs expire in-of-the moneyBuy ZTS Jan-17 46/50/55 call spread collar 17-Oct-16 1.4% 7.4% Jan-17 expiry The 46 call and 50 call expire in-the-moneyBuy an EWZ Jan-17 40 call 24-Oct-16 3.1% 0.00% Jan-17 expiry Call expired out-of-the money at expiryBuy TPINSU 105-120% call spread, short 85% put 14-Nov-16 1.75% 4.50% 13-Jan-17 Option expired and Topix Insurance rose 9.5% over the periodBuy TPNBNK 105-120% call spread, short 85% put 14-Nov-16 1.85% 10.60% 13-Jan-17 Option expired and Topix Banks rose 15.6% over the periodBuy HSBC Jan-17 105% call, Sell HSP 105% call 14-Nov-16 0.52% 4.98% 26-Jan-17 Option expired; HSBC out-performed HSP on the upsideBuy SX5E +Dec19/-Dec18 div future spread 4-Oct-16 €-7.0 €-4.2 6-Feb-17 Close position given sudden SX5E rally and Dec18 div future will lose equity betaOwn Nifty Mar17 call to position for budget surprise 23-Jan-17 0.67% 2.15% 6-Feb-17 Nifty was up 4.9% over the period on the back of a positive budget announcementBuy HSI Feb17 23600 call 9-Jan-17 0.48% 1.09% 13-Feb-17 Close position. HSI was up 4.9% over the periodBuy AMP AU 23-Feb-17 95% puts 30-Jan-17 1.85% 0.27% 13-Feb-17 Unwind the put option post the earnings resultBuy SUN AU 23-Feb-17 95% puts 30-Jan-17 1.39% 0.08% 13-Feb-17 Unwind the put option post the earnings resultBuy 1x V2X Feb17 19 calls, sell 0.85x V2X Mar17 futures 17-Jan-17 -16.1v -14.32v Feb-17 expiry Unwind as the Feb17 call expiredBuy CBA AU 23-Feb-17 95% puts 30-Jan-17 0.76% 0.00% 21-Feb-17 Unwind the put option post the earnings resultOverwrite WES AU 23-Feb-17 103% calls 30-Jan-17 -0.87% -1.20% 21-Feb-17 Unwind the put option post the earnings resultLong V2X Apr future, short V2X May future9-Jan-17 0.45 4.55 24-Feb-17The Apr future has already richened significantly vs. the May future. Prefer V2X May long May callspread, short Apr put as a French election hedge instead.Buy 1x ESTX50 Dec17 3250 calls, sell 1.23x EURJPY Dec-17 115 puts5-Dec-16 0.00% 3.20% 24-Feb-17Unwind ahead of French elections as political uncertainty can weigh on the EURBuy NKY Dec17 19500 call, short Mar17 18000 call 3-Oct-16 0.58% -1.82% 3-Mar-17 Unwind the option before the Mar-17 expiryBuy NKY Mar17-Dec17 17000 strike FVA 3-Oct-16 20.2% 21.6% 3-Mar-17 Unwind the option before the Mar-17 expiryBuy TPNBNK Mar17 1x1.5 180/170 put ratio 9-Jan-17 0.60% 0.00% 10-Mar-17 Option expired out-of-the money as the TPNBNK remained range-boundedBuy ESTX50 17-Mar-17 3350-3450 strangle 6-Mar-17 0.80% 0.00% 17-Mar-17 Expired out-of-the-moneyBuy Volkswagen 2017 dividend future 17-Jan-17 €1.3 €2.0 14-Mar-17 Volkswagen announced a dividend of €2.05 on 14-Mar-17Buy Mar17 UKX 6700 put cont. on GBPUSD<1.20 10-Oct-16 0.81% 0.0% 17-Mar-17Buy Mar17 UKX<6700 / GBPUSD<1.20 dual digital 10-Oct-16 9.1% 0.0% 17-Mar-17 UKX rallied making the hedges expire out-of-the-moneyMar17 UKX 6700 buy qUSD put, sell 0.9x vanilla put 10-Oct-16 0.44% 0.0% 17-Mar-17Buy 6M ATM worst-of {XLF call, XLU put} 19-Sep-16 1.38% 0% 17-Mar-17 While XLF has rallied ~30% since inception, XLU is higher by 4% and the XLU put is the worstperforming option, expiring OTMBuy an SPX Mar-17 97.5% put contingent on USO>105% at 3-Oct-16expiry1.08% 0% 17-Mar-17 The structure offered a deep discount for an SPX hedge and expires OTM as markets have ralliedstronglyBuy a USO Mar-17 105% call contingent on SPX<97.5% at 3-Oct-16expiry1.70% 0% 17-Mar-17 The trade expires OTM due to the SPX rally and a sell off in oil over the past two weeksBuy a Mar-17 SPX<97.5%, USO>105% dual digital 3-Oct-16 11.80% 0% 17-Mar-17 The trade expires OTM due to the SPX rally and a sell off in oil over the past two weeksBuy an IWM Mar-17 ATM call conditional on EEM<95% at 14-Nov-17 1.15% 0% 17-Mar-17 EEM has rallied 15% over the period together with IWMexpiryBuy an XLI Mar-17 ATM call conditional on EEM<95% at expiry 14-Nov-17 0.89% 0% 17-Mar-17 EEM has rallied 15% over the period together with XLIBuy GLD Mar-17 116 call, sell Jun-17 127 call 23-Jan-17 1% 0.31% 17-Mar-17 While GLD rallied strongly earlier in the life of the trade, it recently retreated at the time of expirywith GLD 87bps above the lower strike, the short call is worth 56bps24 Global Equity Volatility Insights | 20 June 2017Table 10: Summary of closed trades as of 19-Jun-17Open Open CloseTrade DescriptionDate Level Level Close Date RationaleLong 2x SPX Aug-17 2200 puts, short 1x SPX Aug-17 2350 21-Feb-17put0.10% 0.01% 17-Mar-17 SPX has traded range bound since inception of the trade, still the carry has been minimal, closeout or roll the positionOwn Nifty Mar17 strangle heading into 5 events 23-Jan-17 1.50% 3.96% 20-Mar-17 Unwind the option post the state election event and Close positionLong XLF Jun17 24 call, short SX7E Jun17 120 call 2-Dec-16 0.74% -5.88% 27-Mar-17 The call vs call relative value trade is now riskier given the potential reversal in US reflation tradesand the potential for European equities to rally in a French election market-favourable outcome.Buy Tencent Mar-17 105% calls 27-Feb-17 1.15% 2.31% 27-Mar-17 Unwind the position for the Tencent earningsBuy HSCEI Mar17 105% call contingent SPX <2200 24-Oct-16 1.20% 0.00% 30-Mar-17 Option expired; HSCEI was up 5.1% but the SPX ended above 2200Buy HSCEI Mar17 9600 put vs short Sep17 8200 put 17-Jan-17 -0.05% -0.78% 30-Mar-17 Unwind post Mar-17 expiry; the short Sep17 put helped reduce the hedging costBuy HSCEI Mar-17 1x1.5 10800-11200 call ratio 21-Feb-17 0.57% 0.00% 30-Mar-17 Option expired; HSCEI stayed flat and failed to rally above the 10800 call strikeLong SX5E Apr17 3300 call, short SX5E Dec17 3450 call 30-Jan-17 -0.60% -0.18% 21-Apr-17 Apr17 option expired so we unwind the entire trade as plannedShort 1x SX5E May17 3350 calls, long 2x SX5E May173450 calls21-Feb-17 0.00% 0.60% 24-Apr-17 Unwind before May expiry following the large 4% SX5E move on 24-Apr, given lack of near termcatalystsBuy an SPX Apr-17 95% put conditional on US 10Y CMS > 14-Nov-162.5% at maturity0.78% 0% 21-Apr-17 In Nov-16, we recommended remaining long equities with cheap hedges. The hedge expires outof the money, while SPX has returned 8.7% for the periodLong SPX Apr17 2300 call, short SPX Dec17 2400 call 30-Jan-17 -0.80% -0.71% 21-Apr-17 The reflation trade has slowed down and the market is in a holding pattern. The long Apr-17 callexpires in-the-money, and the short Dec-17 call still has time valueLong VIX May 16 / 22 call spread vs. short VIX Apr 13 put 21-Feb-17 $0.35 $0.75 19-Apr-17 The call spread still has value due to elevated vol and vol-of-vol and we collect the premium onthe expired short OTM putShort SPX 21-Apr-17 vs. long 28-Apr-17 2325 straddle pair 6-Mar-17 0.50% 1.06% 21-Apr-17 The trade benefited from the rise in post-event volatility relative to pre-event volatilityBuy SX5E 28-Apr-17 3600 call 3-Apr-17 0.26% 0% 28-Apr-17 The option expiredBuy Unicom Apr17 105-115% call spread 21-Feb-17 1.65% 4.25% 27-Apr-17 Single stock option expired in-the-money despite a 1.4% decline in the HSCEIBuy Sands China Apr17 105-115% call spread 21-Feb-17 2.00% 6.97% 27-Apr-17 Single stock option expired in-the-money despite a 1.4% decline in the HSCEIBuy Galaxy Apr17 105-115% call spread 21-Feb-17 2.10% 10.0% 27-Apr-17 Single stock option expired in-the-money despite a 1.4% decline in the HSCEIBuy SX5E Dec19 2500 put, sell SX5E Dec18 2500 put 27-Sep-16 3.97% 1.9% 8-May-17 SX5E has rallied 23.3% since we entered the trade and European political risk abated for nowBuy KOSPI2 May17 103% calls 13-Mar-17 0.63% 5.37% 8-May-17 Option expired; KOSPI2 rallied 8.37% over the periodBuy KOSPI2 May17 97/103% strangle 13-Mar-17 1.38% 5.37% 8-May-17 Option expired; KOSPI2 rallied 8.37% over the periodBuy NKY Jun17 20750 call, sell 1-1.3x 18750-17750 putratio06-Mar-17 0.00% 0.00% 15-May-17Closing the trade post French election; option strikes remain far from the spot levelLong V2X May 26-32.5 call spread and short Apr 22 put 21-Feb-17 €0.20 €0.00 19-May-17 ExpiredBuy 1x contract of SX5E May17 3550 call, sell 5x contractsExpiredof V2X May17 16 puts 3-Apr-17 0.0% -1.63% 19-May-17Long GLD May 123 call vs. short May 130 call 21-Feb-17 0.8% 0.00% 19-May-17 The hedge expired out-of-the-money as S&P 500 remained supportedBuy 1.5x EFA Jun17 103% call, sell 1x EFA May17 ATM call 6-Mar-17 -0.15% -0.20% 19-May-17 EFA rallied strongly leading into the second round of the French elections but subsequently stalledBuy SPX Top50 volatility dispersion 27-Feb-16 14.7% 11.5% 30-May-17 ExpiredLong HSI vs. SPX May-17 90% put switch 06-Feb-17 0.07% 0.00% 29-May-17 Option expired; Both HSI and SPX puts expire out-of-the-moneyBuy the Nifty May17 95/105% strangle outright 20-Mar-17 1.20% 0.00% 25-May-17 Option expired; Nifty failed to move more than the straddle huddle (5%)Long HSBC May-17 65/70 call spread 3-Apr-17 0.95% 4.33% 29-May-17 Option expired; HSBC is up 6.75% on the back of a strong seasonal rallyBuy NKY Jun17 110% Call 02-Dec-16 1.83% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the moneyBuy TPINSU Jun17 110-125% Call Spread 02-Dec-16 3.30% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the moneyBuy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the moneyBuy NKY Jun17-Jun18 18,500 strike FVA 02-Dec-16 21.5% 19.1% 9-Jun-17 Closing the trade on Jun17 expiry; Global volatility collapsed in 1H2017Buy an EWZ Jun-17 40 call conditional on SPX<2200 atexpiry24-Oct-16 1.70% 0% 19-Jun-17 Recent political turmoil in Brazil surrounding Temer's presidency caused a slide in the Brazilianequity market and the BRLBuy SPX Jun17 95% put contingent on US 5Y CMS > 2.15 5-Dec-16 1.04% 0% 19-Jun-17 In Dec-16, we recommended remaining long equities overlayed with cheap hedges. The hedgeBuy 1x Jun-17 ATM XLF call, sell 1.8x Jun-17 ATM worst-ofcalls on XLP and XLUBuy Jun-17 ATM R2K- value outperf call over EEM,contingent on EEM >95%expires out of the money, while SPX has returned 10.2% for the period5-Dec-16 2.10% -12.90% 19-Jun-17 Following the US election and the initial move in rates, XLF rallied and subsequently stalled. In thesame period, the defensive sectors played the catch-up trade5-Dec-16 2.30% 0% 19-Jun-17 Concerns over US tax reform implementation caused small-caps to underperform relative to otherequity markets, including EMBuy QQQ Jun17 132 call , sell XLF Jun17 25 call 20-Mar-17 0.57% 4.73% 19-Jun-17 The trade captured the recent Tech sector outperformance in a period when Financials laggeddriven by lower ratesSource: BofA Merrill Lynch Global Research. Prices reflective of most recently available data which may be delayed in some cases. “Trade Value” represents current valuation of trades initiated on the “Open Date”.Global Equity Volatility Insights | 20 June 2017 25Volatility in Numbers (16-Jun-17)Table 11: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (developed markets)3-month12-monthS&P500 ESTX50 FTSE DAX NKY HSI KOSPI S&P500 ESTX50 FTSE DAX NKY HSI KOSPIImplied 9.8% 13.4% 10.0% 12.6% 13.8% 12.4% 12.2% 14.0% 16.8% 13.6% 16.6% 17.2% 15.8% 14.6%%tile (2yr) 1.2% 1.6% 0.6% 0.8% 0.4% 4.1% 19.9% 7.7% 5.6% 9.5% 5.5% 1.8% 6.3% 24.9%1Week Change -0.2% 0.3% -0.4% 0.3% -0.2% 0.1% 0.3% 0.1% 0.1% -0.1% 0.1% -0.4% 0.0% 0.1%1Mth Change -0.2% 0.0% 0.0% -0.4% -0.5% -0.3% -0.2% 0.1% 0.3% 0.6% 0.1% 0.2% 0.2% 0.7%Realised 7.0% 11.4% 9.6% 10.7% 12.2% 10.2% 10.7% 9.5% 13.3% 12.2% 15.1% 19.6% 13.5% 11.4%%tile (2yr) 11.5% 15.5% 15.6% 9.4% 0.6% 0.8% 21.1% 0.0% 0.0% 0.0% 0.0% 10.8% 1.4% 20.7%1Week Change -0.2% 0.2% 0.2% 0.4% -0.3% 0.1% -0.1% -0.1% -3.2% -0.3% -0.4% -0.2% 0.1% -0.1%1Mth Change 0.4% -0.1% 0.1% 0.1% -0.2% -0.5% 0.1% 0.0% -3.8% -0.7% -1.0% -0.4% -0.5% 0.0%Imp-real spread 2.7% 2.0% 0.4% 1.9% 1.6% 2.3% 1.5% 4.5% 3.5% 1.4% 1.5% -2.3% 2.3% 3.1%Spread %tile (2yr) 57.9% 55.7% 45.1% 57.2% 67.8% 71.3% 58.6% 91.5% 100.0% 85.2% 99.2% 61.6% 89.2% 70.8%1Week Change -0.1% 0.1% -0.5% -0.2% 0.0% 0.1% 0.4% 0.1% 3.3% 0.2% 0.4% -0.2% -0.1% 0.2%1Mth Change -0.6% 0.1% -0.1% -0.5% -0.2% 0.2% -0.2% 0.2% 4.1% 1.3% 1.2% 0.6% 0.7% 0.7%90-110 skew 8.5% 8.4% 6.2% 8.5% 5.8% 3.3% 3.8%%tile (2yr) 16.1% 71.8% 8.8% 66.7% 47.9% 17.8% 14.2%1Week Change 0.2% 0.9% 0.2% 0.7% 0.0% 0.9% 0.8%1Mth Change 0.5% 2.4% 1.2% 1.6% 0.2% 0.9% 0.9%10-day realised12M - 3M term vol spreadS&P500 ESTX50 FTSE DAX NKY HSI KOSPI S&P500 ESTX50 FTSE DAX NKY HSI KOSPICurrent Level 3.2% 9.4% 8.3% 12.1% 7.1% 9.9% 10.6% 4.3% 3.4% 3.6% 3.9% 3.5% 3.4% 2.4%%tile (2yr) 1.0% 16.3% 21.7% 26.3% 0.8% 15.5% 46.7% 99.8% 98.9% 99.6% 99.6% 98.9% 96.9% 79.5%1Week Change -1.5% 2.1% 1.2% 2.5% -4.1% 4.6% 0.9% 0.3% -0.2% 0.2% -0.2% -0.2% -0.1% -0.2%1Mth Change -0.4% 0.9% 0.4% 5.2% -5.8% 0.1% -6.2% 0.3% 0.3% 0.6% 0.5% 0.7% 0.4% 0.9%Cash indexCurrent Level 2,433.15 3,543.88 7,463.54 12,752.73 19,943.26 25,626.49 306.791Wk Change 0.06% -1.18% -0.85% -0.49% -0.35% -1.55% -0.84%1Mth Change 1.35% -2.69% -0.78% -0.40% 0.12% 1.15% 2.38%Source: BofA Merrill Lynch Global ResearchTable 12: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (emerging markets)3-month12-monthEEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40Implied 15.6% 22.9% 25.9% 16.9% 19.2% 24.3% 26.7% 18.5%%tile (2yr) 5.0% 31.7% 28.7% 15.6% 8.9% 39.2% 26.7% 9.2%1Wk Change 0.5% -1.7% 0.9% 1.2% 0.2% -0.2% 0.5% 0.8%1Mth Change 0.5% 1.8% 2.6% 1.9% 1.4% 2.0% 1.4% 0.5%Realised 11.8% 25.3% 20.5% 11.0% 17.6% 22.5% 20.4% 14.9%%tile (2yr) 0.2% 58.8% 20.8% 3.2% 8.5% 5.7% 0.0% 2.8%1Wk Change -1.2% -0.6% -1.1% 0.3% -0.2% -0.4% -0.4% 0.1%1Mth Change -1.2% 6.6% 0.0% -0.6% -0.2% 1.5% -0.9% -0.2%Imp-real spread 3.8% -2.4% 5.4% 5.8% 1.6% 1.9% 6.3% 3.6%Spread %tile (2yr) 85.5% 11.7% 71.7% 95.0% 65.5% 74.9% 99.0% 74.9%1Wk Change 1.8% -1.1% 2.0% 1.0% 0.5% 0.1% 1.0% 0.7%1Mth Change 1.7% -4.8% 2.7% 2.5% 1.6% 0.5% 2.3% 0.7%90-110 skew 7.0% 5.9% 5.2% 8.0%%tile (2yr) 32.8% 68.4% 26.2% 35.4%1Wk Change 0.7% 0.8% 0.4% 0.4%1Mth Change 0.9% 0.4% 0.6% 1.3%10-day realised12M - 3M term vol spreadEEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40Current Level 8.1% 8.8% 17.0% 12.2% 3.6% 1.4% 0.9% 1.7%%tile (2yr) 4.0% 0.2% 17.8% 26.3% 97.5% 80.5% 57.7% 46.2%1Wk Change -0.5% -4.3% -2.2% 0.8% -0.3% 1.5% -0.4% -0.5%1Mth Change -3.9% -8.1% -2.7% 5.3% 1.0% 0.2% -1.2% -1.4%Cash indexCurrent Level 41.22 61,626.41 1,136.99 44,512.151Wk Change -0.94% -0.94% -3.70% -2.97%1Mth Change -1.10% -10.28% -11.99% -6.15%Source: BofA Merrill Lynch Global Research26 Global Equity Volatility Insights | 20 June 2017Options Risk StatementPotential Risk at Expiry & Options Limited Duration RiskUnlike owning or shorting a stock, employing any listed options strategy is by definitiongoverned by a finite duration. The most severe risks associated with general optionstrading are total loss of capital invested and delivery/assignment risk, all of which canoccur in a short period.Investor suitabilityThe use of standardized options and other related derivatives instruments areconsidered unsuitable for many investors. Investors considering such strategies areencouraged to become familiar with the "Characteristics and Risks of StandardizedOptions" (an OCC authored white paper on options risks). U.S. investors should consultwith a FINRA Registered Options Principal. For detailed information regarding the risksinvolved with investing in listed options:http://www.theocc.com/about/publications/character-risks.jspAnalyst CertificationI, Benjamin Bowler, hereby certify that the views expressed in this research reportaccurately reflect my personal views about the subject securities and issuers. I alsocertify that no part of my compensation was, is, or will be, directly or indirectly, relatedto the specific recommendations or view expressed in this research report.Special DisclosuresBofA Merrill Lynch is currently acting as Financial Adviser to Glencore PLC in connectionwith its proposed acquisition in consortium with Qatar Investment Authority, of a 19.5%stake on Rosneft PJSC, which was announced 10th December 2016.BofA Merrill Lynch is currently acting as financial adviser to Intesa Sanpaolo Group,Banco Santander SA, Warburg Pincus LLC and General Atlantic LLC in connectionwith the proposed sale of their entire stake in Allfunds Bank to Hellman & Friedman andGIC, which was announced on 7 March 2017.Global Equity Volatility Insights | 20 June 2017 27DisclosuresImportant DisclosuresPrice charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.One or more analysts responsible for covering the securities in this report owns options on the financial instrumentMLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months: BNP Paribas, Santander.The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: BNP Paribas, Deutsche Bank, ING Group, Intesa, Santander.MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: BNP Paribas, Deutsche Bank, ING Group, Intesa,Santander.The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: BNP Paribas, Deutsche Bank, ING Group, Intesa, Santander.In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale: BNP Paribas, Intesa.MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: BNP Paribas, Deutsche Bank, ING Group, Intesa, Santander.MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: BNPParibas, Deutsche Bank, ING Group, Intesa, Santander.MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. 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In each case, investors should consider any investment opinion relating to such issuer (orits security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses and investment opinion(s) pertaining to such issuer (or its securities and/orfinancial instruments) nor should the analyses or opinion(s) be considered a solicitation of any kind. Sales persons and financial advisors affiliated with MLPF&S or any of its affiliates may notsolicit purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies.Neither BofA Merrill Lynch nor any officer or employee of BofA Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use ofthis report or its contents.Global Equity Volatility Insights | 20 June 2017 29Research AnalystsBenjamin BowlerEquity-Linked AnalystMLPF&S+1 415 676 3595benjamin.bowler@baml.comAbhinandan Deb >>Equity-Linked AnalystMLI (UK)+44 20 7995 7148abhinandan.deb@baml.comAnshul Gupta >>Equity-Linked AnalystMLI (UK)+44 20 7996 7062agupta113@baml.comWilliam Chan, CFA >>Equity-Linked AnalystMerrill Lynch (Hong Kong)+852 3508 3921william.w.chan@baml.comNitin SaksenaEquity-Linked AnalystMLPF&S+1 646 855 5480nitin.saksena@baml.comClovis Couasnon >>Equity-Linked AnalystMLI (UK)+44 20 7995 0303clovis.couasnon@baml.comJason Galazidis >>Equity-Linked AnalystMLI (UK)+44 20 7996 5713jason.galazidis@baml.comChintan KotechaEquity-Linked AnalystMLPF&S+1 646 855 5478chintan.kotecha@baml.comStefano PascaleEquity-Linked AnalystMLPF&S+1 646 855 2631stefano.pascale@baml.com>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules.Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility forthis report in particular jurisdictions.30 Global Equity Volatility Insights | 20 June 2017