Managing Global Risk Exposure with MSCI EAFE® and EM Index Options

Financial professionals interested in learning more about this topic are invited to join Cboe for a webinar on September 30. Learn more and register below.

In August, the total market capitalizations for the MSCI EAFE Index and the MSCI Emerging Markets Index hit $14 trillion and $6.4 trillion, respectively. Additionally, the country weighting of China’s stocks in the MSCI Emerging Markets Index grew to 42.5% last month. Interest in managing global risk exposure has grown in recent years, and investors may be interested in learning more about recent trends and strategies based on global indices.

Performance of Cboe MSCI Benchmark Indices

Cboe offers more than a dozen strategy benchmark indices that show the hypothetical performance of strategies that sell or buy options on the MSCI EAFE® Index (MXEA SM) or MSCI Emerging Markets Index (MXEF SM), including these six indices:

• Cboe MSCI EAFE PutWrite Index (PXEASM)
• Cboe MSCI Emerging Markets BuyWrite Index (BXEFSM)
• Cboe MSCI Emerging Markets PutWrite Index (PXEFSM)
• Cboe MSCI Emerging Markets 20-Delta BuyWrite Index (BDEFSM)
• Cboe MSCI Emerging Markets Covered Combo Index (CMBOEFSM)
• Cboe MSCI EAFE 5% Put Protection Index (PPUTEASM)

Since the inception of the price data history for these indices in March 2006, the BDEF and CMBOEF indices outgained both the MSCI EAFE Index and the $6.4 trillion MSCI Emerging Markets Index.

Wilshire Analytics White Paper Key Findings

The 2020 Wilshire Analytics white paper, Cboe MSCI Option Benchmark Analysis – Harvesting Premiums and Cushioning Multi-Currency Risk to Improve Diversification analyzed the performance of select Cboe MSCI strategy benchmark indices. Key findings of the paper include:

• Expanded Efficient Frontier. An additional 15% Cboe BXEF Index allocation to global stock and bond portfolios improved returns by 25 to 36 basis points and reduced standard deviation by 55 to 112 basis points (Wilshire Exhibit 1).
• Improved Tail Risk and Lower Volatility. All six Cboe indices had maximum drawdowns and lower volatility than their underlying MSCI EAFE and Emerging Markets indices. The PXEF Index, in particular, had a 36% lower standard deviation and 40% less severe drawdown than the MSCI Emerging Markets Index (Exhibit 8).
• Richly Priced Options Premiums Harvested. Five of the Cboe indices sold MSCI EAFE or MSCI Emerging Market options and collected monthly premiums. Emerging Market at-the-money strategies collected the highest premiums; for example, the BXEF Index had an average gross premium of 2.25%. Both MSCI options were usually richly priced, as average implied volatility exceeded average realized volatility by about 5.7 and 8.9 points, respectively (Exhibits 10 & 11).
• Enhanced Risk-Adjusted Returns. The implied volatility risk premium fueled strong risk-adjusted returns for four of the option-selling indices. BXEF, CMBOEF and PXEF indices all had higher straight and risk-adjusted returns than MSCI EAFE and MSCI Emerging Markets indices. The Sharpe Ratio for the CMBOEF Index was 55% higher than the ratio for its underlying index (Exhibits 2, 4, 6 & 10).

Join us for a webinar on September 30

Financial professionals who are interested in learning more about these topics are invited to join a live 60-minute webinar hosted by Cboe Global Markets. Panelists will explore Managing Global Risk Exposure and Income Enhancement with MSCI EAFE® and EM Options, and examine options for managing and harnessing volatility in global equity portfolios.

More Details

Date: Wednesday, September 30, 2020

Time: 12:00 p.m. to 1:00 p.m. ET

Webinar Topics:

• How does the average volatility for non-US stocks compare to that of U.S. stocks?
• How do issues such as trade wars and pandemics impact the relative performance of the MSCI Emerging Markets and MSCI EAFE indices?
• Updates regarding the inclusion of Chinese stocks in the MSCI Emerging Markets Index
• Do options on the MSCI EAFE and EM indices have the potential to help manage volatility and drawdown risk, produce strong risk-adjusted returns, and generate high monthly gross premiums in volatile time periods?

This webinar is available for Continuing Education (CE) credits. Learn more and register here.

CE CREDITS – THE WEBINAR IS ACCEPTED FOR ONE HOUR OF CFP®, CIPM®, RMA®, CIMC®, CIMA®, OR CPWA® CONTINUING EDUCATION (CE) CREDIT FOR WEBCAST ATTENDEES. CFA INSTITUTE MEMBERS MAY SELF-DOCUMENT THEIR CONTINUING PROFESSIONAL DEVELOPMENT ACTIVITIES IN THEIR ONLINE CE TRACKER. THIS WEBINAR IS FOR FINANCIAL PROFESSIONALS ONLY AND IS CLOSED TO THE GENERAL PUBLIC.