FEDERAL RESERVE BANK OF MINNEAPOLIS BANKING AND POLICY STUDIES Minneapolis Options Report February 22 nd We apologize for missing the February 8 th report. ue to the timing of stress testing work, we were unable to produce the report two weeks ago. Commodity Markets The standard deviations of the RNPDs derived from options on the S&P 500 index rose last week. We point out that they are relatively low and near 2007 levels. The riskneutral probabilities of large changes remain in a downward trend. Probability skew is more negative for S&P 500 options with 12 months to expiry than with 6 months to expiry. Recall that probability skews derived from options on the S&P 500 index tend to be negative. This relationship remains at recent extreme levels (see chart below and S&P 500 reports) 12% 10% 8% Difference in Risk neutral Probability 12m Expiry less 6m Expiry Probability = Pr(>20% move up) Pr(< 20% move down) Values are 3 month moving averages The line represents the difference in the skews 6% 4% 2% 0% 1/12/2007 1/12/2008 1/12/2009 1/12/2010 1/12/2011 1/12/2012 1/12/2013 2% 4% In a search for signs of concern related to federal budget issues and sequestration, we examined trading patterns for shorter dated S&P 500 options contracts (6-month) that we follow. We noted that trading shifted to lower strike prices in February. We measured 82% of the volume struck below the spot price in the two measurement weeks of February relative to about 70% in January and February. Page 1 of 2
S&P 500 Options Volume CDF 6 Month Expiry 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.4 0.3 0.2 0.1 0 0.1 0.2 Log(Strike Price/Spot Price) December January February Trading activity continues to be strong in exchange rate markets. Risk-neutral tail probabilities have begun to increase in the Dollar/Pound and Dollar/Euro markets. These same probabilities continue their steep ascent in the Yen/Dollar market. Last week the probability skew turned positive. (see exchange rate reports). Yen/Dollar 8% 7% 6% 5% 4% 3% 2% 1% 0% 4/2011 8/2011 10/2011 12/2011 1/2012 3/2012 5/2012 7/2012 9/2012 11/2012 12/2012 2/2013 RN Pr(decrease) >= 10% RN Pr(increase) >= 10% RNPD standard deviations were stable at low levels in both oil markets that we follow. Trading is down significantly in February relative to January. We have begun to see probability skews favoring downside price moves. (See WTI and Brent reports) Trading in options related to precious metals and grains was extremely light last week. Page 2 of 2
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- S&P 500 0 10 20 30 0 20000 40000 0 10 20 30-13.35% 1.34% 10.51% -0.32% 10.11% -1.12 2.20-15.76% 0.83% 11.11% -0.99% 11.24% -1.04 1.78-2.42% -0.51% 0.60% -0.67% 1.13% 0.08-0.41 12/30/2007 1/28/2010 2/27/2012
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- S&P 500 derived from options that expire in approximately 12 months. 10 20 30 0 5000 10000 0 10 20 30 40-23.35% 1.43% 15.91% -1.51% 16.49% -1.13 1.99-23.16% 1.41% 16.40% -1.38% 16.54% -1.06 1.83 0.19% -0.02% 0.49% 0.13% 0.05% 0.06-0.17 12/30/2007 1/28/2010 2/27/2012
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- CRUDE OIL FUTURES (WTI) 10 20 30 40 0 500 1000 1500 0 5 10 15 20 25 30-22.13% 1.56% 18.14% -0.39% 16.34% -0.67 0.91-22.56% 2.12% 18.49% -0.18% 16.96% -0.81 1.30-0.43% 0.56% 0.35% 0.21% 0.62% -0.14 0.39 2/14/2011 12/15/2011 10/14/2012
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- CRUDE OIL FUTURES (Brent) 10 20 30 40 0 2000 4000 6000 0 5 10 15 20 25 5/14/2012 7/13/2012 9/11/2012 1/9/2013-21.90% 1.53% 17.65% -0.50% 16.10% -0.76 1.17-24.63% 2.14% 17.78% -0.66% 16.88% -0.79 0.82-2.73% 0.60% 0.13% -0.16% 0.78% -0.03-0.35
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- GOLD FUTURES 5 10 15 20 25 0 1000 2000 3000 4000 0 5 10 15 20 25 2/14/2011 12/15/2011 10/14/2012-13.96% -0.68% 12.10% -0.78% 10.60% -0.02 0.69-14.55% -0.33% 12.52% -0.67% 10.95% -0.15 0.62-0.59% 0.35% 0.43% 0.11% 0.36% -0.13-0.07
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- SILVER FUTURES 15 20 25 30 35 40 0 100 200 300 400 0 10 20 30 40 2/14/2011 12/15/2011 10/14/2012-24.57% -0.64% 19.84% -1.56% 17.86% -0.27 0.51-24.96% -0.40% 20.18% -1.44% 18.08% -0.28 0.48-0.40% 0.24% 0.34% 0.13% 0.22% -0.01-0.04
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- DOLLAR-EURO EXCHANGE RATE FUTURES derived from options that expire in approximately 3 months. 0 5 10 15 20 0 1000 2000 3000 4000 5000-25 -20-15 -10-5 0 5 10 15 20 25-25 -20-15 -10-5 0 5 10 15 20 25 0 5 10 15 7/14/2011 3/12/2012 7/11/2012 11/9/2012 Decrease <=10% Increase >= 10% -5.34% 0.15% 5.33% 0.10% 4.26% -0.14 0.30-5.94% 0.41% 6.00% 0.22% 4.70% -0.25 0.28-0.60% 0.26% 0.67% 0.11% 0.45% -0.11-0.01
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- DOLLAR-POUND EXCHANGE RATE FUTURES derived from options that expire in approximately 3 months. 0 5 10 15 20 0 200 400 600 800-25 -20-15 -10-5 0 5 10 15 20 25-25 -20-15 -10-5 0 5 10 15 20 25 0 2 4 6 8 10 7/14/2011 3/12/2012 7/11/2012 11/9/2012 Decrease <=10% Increase >= 10% -4.48% 0.15% 4.44% 0.08% 3.55% -0.15 0.43-5.41% 0.31% 5.50% 0.19% 4.30% -0.21 0.31-0.94% 0.16% 1.05% 0.11% 0.75% -0.06-0.12
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- YEN-DOLLAR EXCHANGE RATE FUTURES derived from options that expire in approximately 3 months. 5 10 15 20 25 0 2000 4000 6000-25 -20-15 -10-5 0 5 10 15 20 25-25 -20-15 -10-5 0 5 10 15 20 25 0 2 4 6 8-7.80% 0.38% 7.82% 0.18% 6.25% -0.22 0.41-8.38% 0.00% 8.79% 0.15% 6.82% 0.14 0.31-0.59% -0.38% 0.96% -0.03% 0.57% 0.35-0.11 7/14/2011 3/12/2012 7/11/2012 11/9/2012 Decrease <=10% Increase >= 10%
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- CORN FUTURES 15 20 25 30 35 40 0 2000 4000 6000 8000 0 10 20 30-25.99% -1.77% 21.53% -1.97% 18.76% -0.03 0.23-24.89% -2.11% 21.27% -1.85% 18.30% 0.11 0.30 1.10% -0.34% -0.26% 0.12% -0.46% 0.14 0.08 2/14/2011 12/15/2011 10/14/2012
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- SOYBEAN FUTURES 15 20 25 30 0 200 400 600 0 5 10 15 20 25-19.94% -1.38% 17.83% -1.21% 15.01% 0.04 0.39-20.21% -1.12% 17.72% -1.15% 15.10% 0.01 0.38-0.26% 0.26% -0.11% 0.06% 0.10% -0.02-0.01 2/14/2011 12/15/2011 10/14/2012
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- WHEAT FUTURES 20 25 30 35 40 0 200 400 600 0 10 20 30-25.82% -1.95% 21.39% -2.01% 18.69% 0.01 0.29-25.06% -1.70% 21.59% -1.70% 18.44% 0.02 0.26 0.76% 0.24% 0.20% 0.31% -0.26% 0.00-0.03 2/14/2011 12/15/2011 10/14/2012
RISK NEUTRAL PROBABILITY DENSITY FUNCTIONS -- ishares DOW JONES US REAL ESTATE derived from options that expire in approximately 3 months. 0 10 20 30 0 200 400 600 0 5 10 15 20 2/14/2011 12/15/2011 10/14/2012-6.60% 1.02% 6.52% 0.41% 5.45% -0.89 1.72-7.11% 1.76% 6.36% 0.53% 6.01% -1.62 4.12-0.51% 0.74% -0.16% 0.12% 0.55% -0.73 2.39