On June 20 MSCI, Inc. issued an announcement that noted (in part) –

“ … beginning in June 2018, it will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index. This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally. Consequently, MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73% of the weight of the MSCI Emerging Markets Index at a 5% partial Inclusion Factor. … “

The MSCI Emerging Markets Index captures large- and mid-cap representation across 23 Emerging Markets countries. As of May 31, the index had a total aggregate market capitalization of more than $4 trillion and 830 constituent stocks.


As shown in the chart below, over a recent 15-year period the MSCI Emerging Markets Index had high returns (with a gain of 315%), but also experienced high volatility. The 30-trading-day historic volatilities on Nov. 7, 2008 rose to 87 for the MSCI Emerging Markets Index, and 79 for the S&P 500 Index, according to Bloomberg.


CBOE offers options on the MSCI Emerging Markets Index (MXEF) for investors who wish to manage global equity exposure. Key features of the MXEF 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 26 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”)


For global investors who are concerned about the potential for more emerging volatility, index options are tools with potential to provide ways to generate more income by receiving options premiums, and to help protect a portfolio from damaging huge drawdowns.  

Both of the next two charts show higher volatility this year related to options on MXEF or EEM.

The first chart shows a volatility risk premium, in that (1) the estimated implied volatilities for 30-day MXEF options in 2017 averaged (a) 23.1 at 90% moneyness (this could be applied to 10% out-of-the-money protective put options), and (b) 15.4 for the at-the-money options, and (2) the average 30-trading-day historic volatility was only 9.5. A strategy that has gained in popularity in recent years is the strategy of selling cash-secured index put options; sellers of these index options often appreciate the fact that the implied volatility has been higher than the realized volatility. 

The next chart below shows that, for indexes reflecting 30-day expected volatility, the average daily closing values were 17.1 for the CBOE Emerging Markets ETF Volatility Index (VXEEM), but only 11.6 for the CBOE Volatility Index (VIX). Implied volatility in emerging markets continues to usually be above that of the U.S. stock market.


For more information on managing global risk and on MXEF options (including charts on options open interest and country weights for the MXEF Index) please see the June 19 CBOE blog on MXEF, and the MXEF website at www.cboe.com/MXEF.