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Options On Russian Underlying Assets: A Foreign Investors Viewpoint

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Mature borrow market. Increasing listings of Russian underlyings on LSE. 6. But Prices Remain Wide ... will continue to push credit access to Russian banks ... – PowerPoint PPT presentation

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Title: Options On Russian Underlying Assets: A Foreign Investors Viewpoint


1
Options On Russian Underlying Assets A Foreign
Investors Viewpoint
Strictly Private Confidential
  • Avi Shown-Keen

2
Options on Russian Underlying Assets A Foreign
Investors Viewpoint
A History Lesson
RTS Index, Jan 2004 Dec2004
Yukos, Jan 2004 Dec2004
3
Options on Russian Underlying Assets A Foreign
Investors Viewpoint
The Picture Today
RTS Index, Jan 2005-present
LUKOIL, January 2005-present
LUKOIL Since 2005
4
Options on Russian Underlying Assets A Foreign
Investors Viewpoint
The Picture Today
SURGUT, January 2005-present
GAZPROM, January 2005-present
LUKOIL Since 2005
5
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

6
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

7
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
8
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
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