Managing Brazilian Volatility with Futures and Options on the VXEWZ Index

Over the next five years, some projections indicate that the annual GDP of Brazil could surpass that of both France and the United Kingdom, and that Brazil could rise to become the fifth largest economy in the world.

More investors now are concerned with the issue of managing Brazilian volatility.

Today CBOE Holdings announced today that the following products will be launched in the coming weeks:

  • CBOE Brazil ETF Volatility Index security futures (VXEW) – Tuesday, February 21 on CFE
  • CBOE Brazil ETF Volatility Index options (VXEWZ) – Tuesday, March 6 on CBOE www.cboe.com/VXEWZ

STOCK INDEX PRICES SINCE 2000



30-DAY HISTORIC VOLATILITY
Since February 2001, the average 30-day historic volatility has been about 25.6 for the MSCI Brazil Index and 18.9 for the S&P 500 Index.

30-DAY IMPLIED VOLATILITY

Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

CBOE calculates and disseminates the CBOE Brazil ETF Volatility Index (ticker VXEWZ), which reflects the implied volatility of the EWZ ETF. www.cboe.com/vxewz

The price history for the VXEWZ Index begins in March 2011. The peak daily closing value for the VXEWZ Index was 63.49 on Oct. 3, 2011.

At mid-day today (Feb. 17), the VXEWZ Index was at 30.89 and the VIX was at 18.14.


Delayed quotes table is updated at http://www.cboe.com/micro/VIXETF/VXEWZ/

CORRELATIONS

As noted in the table below, the daily changes in the VXEWZ Index had a negative 0.85 correlation to those of the EWZ ETF during the time period covered.

TRADABILITY AND FUTURES AND OPTIONS

If you believe that the VXEWZ Index is mean-reverting, and you believe that there is a good chance that VXEWZ might rise significantly in upcoming weeks or months, four strategies that you might consider in the future include –

  1. Long VXEWZ call options
  2. Long VXEWZ call spreads
  3. Short VXEWZ put credit spreads
  4. Long VXEWZ futures.

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products. You can visit http://www.cboe.com/micro/VIX/vixintro.aspx for some information regarding pricing, and http://www.cboe.com/micro/VIXETF/VXEWZ/ for more information on the VXEWZ Index.

The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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