Credit and Credit Volatility were discussed in presentations on September 13 at the 7th Annual Cboe European Risk Management Conference (RMC) by Yoshiki Obayashi, Head of Research, Applied Academics, LLC, and Brett Pybus, CFA, Managing Director, BlackRock.

Topics discussed by the expert presenters included;

  • Markets and use cases for corporate bond index futures and ETFs
  • What drives credit volatility and what do credit volatility indexes tell you about the state of credit markets and spreads?
  • How to properly asses credit volatility and its relationship with equity and rates volatility

Brett Pybus’ presentation covered markets and use cases for corporate bond ETFs and index futures, and delved into these four topics:

  • Corporate bond ETF introduction
  • Bond ETF ecosystem
  • Use cases for corporate bond ETFs / options on corporate bond ETFs
  • Development of corporate bond index futures, including the new CFE Futures on the iBoxx® iShares® $ High Yield Corporate Bond Index (IBHY Index) (visit www.cboe.com/IBHY and a recent Cboe IBHY Blog with seven charts for more details).

CHART #1 – AUM FOR FIXED-INCOME ETFs HAS GROWN TO MORE THAN $800 BILLION

Pybus presented a table showing more than $800 billion in AUM is invested in fixed-income ETFs.

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CHART #2 – GROWTH IN BOND ETF LISTED OPTIONS OPEN INTERESTrmc2

  • iShares ETFs had 4 out of the top 5 most actively traded bond options markets in 2017 (HYG, TLT, IEF, LQD).
  • HYG listed options traded $184bn in total notional in 2017, a 30% increase in trading volume from 2016.

 

ETF options can be used for:

  • Downside Management: comprehensive hedging through buying puts
  • Yield Enhancement: earn premiums through selling out-of-the-money calls
  • Volatility Play: establish a position on volatility without a directional view
  • Leverage: leverage investments and build specific exposures
  • Synthetic Forward: replicating long and/or short exposures

 

 

VIX AND TYVIX INDEXES AND EXPECTED VOLATILITY

For traders and investors who are trying to gauge investor sentiment and volatility expectations in a variety of markets on an intraday or long-term basis, Cboe offers dozens of volatility indexes, including the Cboe Volatility Index® (VIX®) and the Cboe/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX). www.cboe.com/volatility.  In the chart below, the daily closing prices for the TYVIX Index ranged from a low of 3.21 in December 2017, to a high of 8.62 in June 2013. The IBXXIBHY Index and the TYVIX had a correlation of negative 0.36 of weekly returns since 2013. Futures and options on the VIX Index, along with the new IBHY future, can be used for portfolio management purposes.

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