Options On Russian Underlying Assets: A Foreign Investors Viewpoint

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Options On Russian Underlying Assets A Foreign
Investors Viewpoint
Strictly Private Confidential

• Avi Shown-Keen

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Options on Russian Underlying Assets A Foreign
Investors Viewpoint
A History Lesson
RTS Index, Jan 2004 Dec2004
Yukos, Jan 2004 Dec2004
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Options on Russian Underlying Assets A Foreign
Investors Viewpoint
The Picture Today
RTS Index, Jan 2005-present
LUKOIL, January 2005-present
LUKOIL Since 2005
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Options on Russian Underlying Assets A Foreign
Investors Viewpoint
The Picture Today
SURGUT, January 2005-present
GAZPROM, January 2005-present
LUKOIL Since 2005
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The Dichotomy of the Russian Market

• Political Risk - Yukos/Putin
• Lack of Transparency Poor Corporate
  Governance
• Inflation
• Over- reliance on Oil/Gas
• New Issues

• Yukos - is it forgotten?
• Tie-up with Western Companies
• Stable Macro position Paris Club, SP upgrades
• Advance of other Emerging Economies
• New Issues could diversify market and remove oil
  weight

• All reasons to not invest in Russia can be viewed
  the other way
• The Reform Process of UES is a very
  positive event, but conversely its delay is
  viewed negatively
• This backdrop provides a perfect scenario
  for the use of options ie. Limited liability,
  unlimited upside
• But

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Current Option Liquidity The rational for the
Bid/Offer Spread

• Massive increase in traded option volume, 15-20
  mn/wk in March 2005, Increased tenfold
• At least 90 of traded volume is on ADR
  underlyings

• Positive Aspects of the ADR Market
• Low trading costs and DMA
• Mature borrow market
• Increasing listings of Russian underlyings
  on LSE

• Issues with trading Local Stock
• Commission (3 vols)
• Cost of trading on Share Register
• Inability to short
• Settlement Issues

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Liquidity

• But Prices Remain Wide
• The Justification for the bid/offer spread
• Input Parameters
• Width of div. estimates and associated
  uncertainty eg. Lukoil
• Volatile borrow, unable to lock a rate
• High option brokerage
• Open interest. In any underlying apart from
  Lukoil, Surgut or Gazprom, participants have
  small positions, Hence implieds move rapidly on
  the back of small volume.
• Major cause is inability of Western banks to
  trade with Russian counterparts due to credit
  issues
• Result 2 option markets in operation on
  Russian Single Names
• Western Market
• Local Market

High Implieds Vol buyers dominate Retail
flows Low Implieds
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The Future

• View predicated on
• Continued Macro Stability and no Commodity price
  collapse 
• Continued Political Stability
• Western banks will continue to push credit access
  to Russian banks
• Interbank market volume will increase and two
  markets will converge in volatility
• New entrants into Russian options
• - Increase in Liquidity
• 3. Longer the bull run continues, greater
  likelihood of increased risk limits