20180809-法国巴黎银行-Brazil__What_the_option_market_tells_about_the_elections__9页_931kb

Summary of EM/QUANT STRATEGY Document: Brazil Election Impact on BRL

Core Content

This document from Banco BNP Paribas Brasil S.A. analyzes the implications of the upcoming Brazilian presidential election on the Brazilian Real (BRL) using a special event model. The focus is on the market's implied probability of BRL movements in the days following the election, based on FX volatility smile data.

Key Findings

• The market is currently pricing a 68% probability of a 3% BRL appreciation on the day after the second round of the election (28 October 2018), compared to a 32% probability of a 6.2% depreciation.
• The probability density function (PDF) indicates a fatter tail for depreciation, suggesting increased market uncertainty around potential negative outcomes.
• The analysis compares the volatility smile data from the day before and after the election, highlighting a reduction in forward variance excess by the second round, indicating less market concern about the final candidates.

Historical Context

• The model has been applied since June 2017, with results showing varying probabilities over time.
• For example, on 31 May 2018, the market implied an 82.8% probability of BRL appreciation and 17.2% probability of depreciation.
• The forward jump PDF (Chart 2) shows a shift in market expectations, with a higher likelihood of depreciation in the current update compared to the previous one.

Strategy Overview

• The team is long BRL via options, specifically:
  • A one-touch option at 3.30 for 8 November 2018
  • A relative value trade against CLP, EUR, and AUD
• The base case scenario for the election is less negative than the market consensus.
• To manage tail risks, the team has adopted a cheap option structure, which allows for potential benefit in the case of an undesired election outcome.

Additional Insights

• The market's implied volatility is used to calculate the probability of BRL movements, reflecting the market's expectations of future uncertainty.
• The special event model is a methodology used to assess the impact of political events on currency markets, and it has been previously applied to the Mexican election (AMLO's victory was not considered a significant event for MXN).

Legal and Compliance Information

• This document is a marketing communication and not investment research, as per MiFID II regulations.
• It is intended for Professional Clients and Eligible Counterparties.
• The document does not constitute an offer to sell or a solicitation of an offer to buy any financial instrument.
• It may contain hypothetical or back-tested performance data, which is for illustrative purposes only and not indicative of future results.
• BNPP may have conflicts of interest due to its involvement in investment banking, underwriting, or advisory services for the entities discussed.
• The document includes important disclosures for options, ETFs, and securities not registered under US laws, emphasizing the risks and suitability for sophisticated investors.

Disclaimer

• The information is not exhaustive and may be subject to conflicts of interest.
• BNPP does not accept any liability for the accuracy or completeness of the information provided.
• The document is confidential and must not be copied or distributed without prior written consent.
• It is not a prospectus or public offering and does not provide investment, tax, or legal advice.

Regulatory Information

• The document is subject to legal requirements in various jurisdictions, including the UK, France, Germany, Belgium, and Ireland.
• In the UK, the document is communicated by BNPP London Branch, which is authorized and supervised by the ECB, ACPR, FCA, and PRA.
• In France, the report is distributed by BNPP SA and BNPP Arbitrage, both authorized and supervised by ECB and ACPR.
• In Germany, the document is distributed by BNPP Niederlassung Deutschland, a branch of BNPP SA, authorized by ECB and ACPR.
• In Belgium, the report is distributed by BNPP Fortis SA/NV, authorized and supervised by ECB and the National Bank of Belgium.

Conclusion

The document outlines a probabilistic view of the BRL's potential movement post-election, highlighting a higher probability of appreciation but also acknowledging the increased risk of depreciation. The strategy is long BRL with hedging mechanisms in place to protect against adverse outcomes. The analysis is based on FX volatility smile data and is part of a broader special event model used by BNP Paribas for political risk assessment.