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1、An Introduction to CDX EM Options An overview of CDX EM Options trading conventions and uses for investors Trang NguyenAC 1 212 834 2475 Trang m nguyen J P Morgan Securities LLC Jonny Goulden AC 44 20 7134 4470 jonathan m goulden J P Morgan Securities plc See end pages for analyst certification and
2、important disclosures including investment banking relationships J P Morgan does and seeks to do business with companies covered in its research reports As a result investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report Investors shou
3、ld consider this report as a single factor in making their investment decision Agenda Page What are CDX EM options What are CDX EM options CDX EM index options are an option to buy go long risk or sell go short risk the CDX EM index of single name EM sovereign CDS at a fixed price on a future date T
4、hese have recently started trading As with Developed Market CDS index options CDX EM index options will allow investors to take structured directional views volatility views or combinations of both on the basket of EM sovereign CDS in CDX EM Call options give investors the right to buy risk buy the
5、CDX EM index price which is selling protection and receiving the spread at the strike price Put options give investors the right to sell risk sell the index price which is buying protection and paying the spread at the strike price Credit index option alternative terminologies Credit index option te
6、rminology Long riskCallOption to buy index priceOption to sell index protectionReceiver Short riskPutOption to sell index priceOption to buy index protectionPayer Source J P Morgan 1 How are they quoted CDX EM options are quoted with the strike in price terms given the index trades on a price rather
7、 than a spread basis similar to CDX NA High Yield options The price on CDX EM is 100 Index Upfront where the Index Upfront is the amount needed to make the present value of the index coupon plus the upfront equal the present value of the expected loss Index Upfront PV Index Coupon PV Expected Loss E
8、 g with Index Coupon of 100bp and running spread of 195bp Index Upfront is 4 23pt and Index Price is 95 77pt CDX EM options have a European style expiry and the cost is quoted in cents upfront so that an upfront premium of 40c on 10m notional is a cost of 40 10000 10m 40 000 The option pricing model
9、 is the standard Black model used for other credit index options given these are options on forwards 2 CDX EM Index Options Expiry Settlement and Defaults As CDX EM options have a European style expiry they can only be exercised on fixed expiry dates 3rd Wednesday of each month CDX EM options are ph
10、ysically settled as standard They do not automatically roll when the index rolls rather they refer to a specific series If an option is In The Money at expiry then the investor will enter the index contract at the strike price Index options holders need to settle defaults that occur in the underlyin
11、g index if they exercise their option as discussed in detail later 3 CDX EM Index Options Summary of Standard Terms CDX EM option standard terms Option styleEuropean Strike quoteAt The Money Forwards on Index Price PremiumQuoted in Cents upfront Premium payment date Trade date 3 business days Expira
12、tion time Exercise window is 9 11am NY time third Wednesday of the month SettlementT 3 Settlement termsExpiry 3 business days Settlement amount a If no credit events before expirySettlement by buying or selling the index at strike at expiry b If one or more credit events before expiryi Settlement by
13、 buying or selling the index at strike at expiry ii Single name CDS default is settled under standard procedures Source J P Morgan 4 Who are the likely users of CDX EM Options Asset allocators to take or limit EM exposure End investors can participate in EM upside while limiting downside for example
14、 by buying call options or can hedge existing less liquid EM portfolios by buying put options EM portfolio managers to hedge or tailor views EM portfolio managers may tailor their directional views using options and may also hedge tail risk scenarios or look to enhance returns in a range bound envir
15、onment Options strategies to take nuanced views on volatility skew etc Options specialists may look to trade volatility or implement views around the pricing of volatility at different strike points skew or maturity points calendar Relative value in credit options markets Investors already active in
16、 Developed Market credit options will likely also find opportunities for relative value between CDX EM options and DM credit index options For example an investor concerned that global growth downgrades will lead to a rise in volatility may look to see if this is being priced appropriately between CDX EM and iTraxx Crossover options 5 Agenda Page CDX EM Index Options Simple Strategies Buying a call option enables investors to express a bullish view spreads will tighten the CDX EM index price wil
