Regarding the possibility of launching new options on MSCI global indexes, in the past month I have received positive feedback from more than a dozen managers of options-based funds that are listed in a new 2015 white paper. In the past decade a number of managers have requested new CBOE options on MSCI’s global indexes.
CBOE announced an April 21 launch date for cash-settled products on two of the world’s best known global indexes –
- Options on the MSCI EAFE® Index (MXEA), and
- Options on the MSCI Emerging Markets Index (MXEF).
MANAGING GLOBAL STOCKS AND VOLATILITY
Interest in global equities and related benchmarks has grown tremendously over the past two decades, but some investors have noted the higher volatility of certain global investments.
Over the past decade, the annualized standard deviations of returns have been about 24% for the MSCI Emerging Markets Index (MXEF), 18% for the MSCI EAFE Index, 15% for large-cap U.S. stocks, and 11% for some of CBOE’s buywrite benchmark indexes. As shown in the table, the MXEF Index had big annual moves of more than 20% (up or down) in 8 of the past 12 years. In 2008 the EAFE and MXEF indexes both fell by more than 45% and the CBOE EFA ETF Volatility Index (VXEFA) rose 79%.
FEATURES OF THE NEW OPTIONS ON MSCI INDEXES
Proposed contract specifications for the new index options are posted at www.cboe.com/MXEA and www.cboe.com/MXEF. Key features of the new index options include --
- Efficiency with large contract size - Cash-settled options on the MSCI indexes will have a $100 multiplier and a notional size that is about 30 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")
VOLATILITY AND THE MSCI INDEXES
As shown in the next chart below, the 30-day historic volatility can fluctuate substantially. According to Bloomberg estimates the highest 30-day volatility since 2008 was more than 76 for the MSCI EAFE Index and more than 87 for the MSCI Emerging Markets Index.
Physically settled options on the EFA ETF and the EEM ETF are listed on CBOE. CBOE also offers more than 20 volatility indexes that are updated real-time measures of expected 30-day volatility, including the CBOE EFA ETF Volatility Index (VXEFA), and CBOE Emerging Markets ETF Volatility Index (VXEEM). www.cboe.com/volatility. Futures and options are offered on the VXEEM Index.
MSCI EAFE INDEX
The MSCI EAFE Index (MXEA) is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It captures large- and mid-cap representation, and comprises the MSCI country indexes that represent developed markets outside of North America: Europe, Australasia and the Far East. The MSCI EAFE Index is calculated in U.S. dollars on a real-time basis, and values are disseminated every 60 seconds during market trading hours. At the end of February 2015 the MSCI EAFE Index had these features –
- 909 constituent stocks;
- the three largest stocks in terms of market capitalization were Nestle (1.91% of index), Novartis (1.78%), and Roche Holding Genuss (1.45%);
- companies from the United Kingdom and Japan accounted for more than 42% of the country weightings in the index (see the pie chart).
MSCI EMERGING MARKETS INDEX
The MSCI Emerging Markets Index (MXEF) captures large- and mid-cap representation across 23 emerging markets countries, and the index covers approximately 85% of the free-float-adjusted market capitalization in each country. At the end of February 2015 the MSCI Emerging Markets Index had these features –
- had 836 constituent stocks,
- the three largest stocks in terms of market capitalization were Samsung Electronics (3.46%), Taiwan Semiconductor Mfg. (2.99%), and Tencent Holdings (2.29%), and
- companies from China accounted for more than 22% of the country weightings in the index (see pie chart).
To learn more about tools to manage global portfolios and volatility, please visit CBOE web pages on -