Options on MSCI EAFE and EM Indexes – Bigger Notional Size and Added Expirations

CBOE recently launched trading in options on the MSCI Emerging Markets Index (MXEF) and the MSCI EAFE Index (MXEA).CBOE’s options on MSCI indexes are designed to provide investors different ways to efficiently gain exposure to the global equity markets and execute risk management, hedging, asset allocation and income generation strategies.

ADDED EXPIRATION DATES

At the launch of options on the MSCI EAFE (MXEA) and MXEF indexes, a number of institutional customers expressed great interest in the new large-sized, cash-settled index options that could help manage global exposure, but the customers also suggested the listing of more than one expiration date for the new options.  CBOE recently added two more expiration dates, so that both the MXEF and MXEA options now have Friday expirations on July 17, August 21, and September 18.

LARGE NOTIONAL SIZE

Buy-side investors are very intrigued by the fact that the new options on the MXEF and MXEA indexes have potential to provide a great deal of “bang-for-the-buck,” as the notional size of the new cash-settled index options is about 25 times the size of the related ETF options, as shown in  the chart below.jm1 - Notional size 4

ATTRACTIVE VALUATIONS FOR MSCI EAFE AND EM INDEXES?

Both the MXEF and MXEA indexes hit their all-time daily closing highs in the fall of 2007, and both indexes have not yet surpassed their 2007 highs. The closing values on July 6, 2015 were 1819.88 for the MXEA Index and 988.05 for the MXEF Index. A prudent question to ask could be – do these indexes relatively have attractive valuations?jm2 - EAFE EM line thru July 6

In reading the Global Equity Valuations section of the 71-page JP Morgan Asset Management Guide to the Markets (June 30, 2015) I noticed that the MSCI EAFE and Emerging Markets arguably both had relatively attractive valuations, in that they both had lower Price to Forward Earnings ratios than the United States, and also had higher Dividend Yields than the United States.  jm3- P-E and Div Yield

MANAGING GLOBAL EQUITY EXPOSURE WITH MXEA AND MXEF OPTIONS

Options on the MSCI Indexes have potential to be efficient tools for managing global exposure. At the end of June the total market capitalizations were $13 trillion for MSCI EAFE (MXEA) and $4 trillion for MXEF. In 2014 the estimated amount of assets under management tracking the indexes was $2 trillion for MSCI EAFE and $1.7 trillion for the MXEF Index. The largest countries in the MSCI EAFE Index are the United Kingdom and Japan, while recent news reports have asked whether stocks from mainland China will be included in the MXEF Index.jm4- Country weights

GAUGING GLOBAL VOLATILITY WITH THE VXEEM AND VXEFA INDEXES

Key real-time gauges of global equity implied volatility include the CBOE Emerging Markets ETF Volatility Index (VXEEM), which reflects the implied volatility of the EEM ETF and the CBOE EFA ETF Volatility Index (VXEFA). Both indexes rose more than 40% after June 23.jm5- VXEEM VXEFA

MORE INFORMATION

Here are links to key information related to options on the MSCI indexes —

To learn more about how the CBOE options on the MSCI Emerging Markets Index (MXEF) and the MSCI EAFE Index (MXEA) can help you manage your global volatility exposure, please visit www.cboe.com/MSCI.