A key topic for global investors today is whether Chinese A-Shares will be added to the popular MSCI Emerging Markets Index on June 14. A recent news story in the Wall Street Journal noted that --

“MSCI is set to decide this month whether to include in its benchmarks the shares of companies listed on China’s domestic exchanges. U.S. options traders are ramping up bets on the outcome using the biggest exchange-traded fund linked to China. If the MSCI decides to include the stocks, known as A-shares, it would mean foreign money could potentially flow into mainland-traded stocks through funds that track the indexes, potentially sending them higher. Goldman Sachs Group Inc. estimates that about $1.5 trillion of assets track the MSCI Emerging Markets index, so there’s a lot riding on the decision. On Tuesday, more than 163,000 bearish put options and 108,000 bullish call options were traded on the iShares China Large-Cap ETF, which closed at $34.64 per share. The total of almost 272,000 options is more than double the daily average so far this year. …”

CBOE offers a number of volatility and options products to help investors gauge and manage their global equity exposure. LARGE-SIZED CASH-SETTLED OPTIONS ON MSCI INDEXES

In 2015 CBOE launched options on the MSCI Emerging Markets Index (MXEF) and the MSCI EAFE Index (MXEA). Several investors have told me they see promising long-term prospects and potential for the contracts. On June 7 the MXEF open interest was 2,505 MXEF puts and 1,252 MXEF calls. Key features of the global index options include — • Efficiency with large contract size – cash-settled options on the MSCI indexes have a $100 multiplier and a notional size that is about 24 times larger than the options on the EFA and EEM ETFs. • Simplicity – achieve broad-market exposure in one trade, as options on MSCI options offer investors tools with the potential to adjust exposure to the global markets at a fraction of the cost of buying individual stocks and ETFs • Cash settlement – with no unwanted delivery of stocks or ETFs • Predetermined risk for option buyers – index option purchasers risk only the premium they pay for the option. The risk is both known and limited. • European-style exercise – which protects option sellers against assignment prior to expiration (so-called “early assignment”)


The first two volatility skew charts below show that the recent Bloomberg estimates for implied volatility at 90% moneyness (for put options that were 10% out-of-the money) were 25.1 for options on the MSCI Emerging Markets Index (MXEF)  and 21.5 for SPX options. 1

The next volatility skew chart from Livevol shows higher implied volatility for the iShares China Large-Cap ETF (FXI) out-of-the-money put options expiring on June 17 and June 24.


VOLATILITY INDEXES At mid-day today CT here were the approximate values for three volatility indexes - the CBOE China ETF Volatility Index (VXFXI) was around 25.5, the CBOE Emerging Markets ETF Volatility Index (VXEEM) was around 20.9, and the CBOE Volatility Index (VIX) was around 14.5. http://www.cboe.com/micro/volatility/introduction.aspx.

COUNTRY WEIGHTS IN MSCI EMERGING MARKETS INDEX If and when Chinese A-Shares are included in the MXEF Index, the country weightings in the index could experience significant changes. The chart below shows the weightings at the end of May for the MXEF Index, which had 837 constituent stocks from 23 countries.

3 MORE INFORMATION To learn more about managing global equity exposures and the CBOE options on MSCI indexes, please visit http://www.cboe.com/micro/msci/default.aspx.