FEDERAL RESERVE BANK OF MINNEAPOLIS BANKING AND POLICY STUDIES Minneapolis Options Report October 3 rd Risk neutral expectations for inflation continue to fall. Bank and Insurance company share prices also fell accompanied by increased tail risks. Tail risks for commodities also rose while prices fell as the dollar continued to strengthen. Inflation Inflation expectations for the next 1, 2 and 5 year periods continue to decline. MPDs derived from caps and floors on the CPI now show a 34% chance of inflation falling below 1% over the next twelve months and expectations of high inflation have declined below 5%. Expectations for inflation over the next 5 years have also declined. The median of the MPD is currently 2% and risk neutral probabilities of large changes are at five year lows. Page 1 of 4
Interest rates Trading in options on the ten year Treasury futures expiring in three months was strong which is common at the start of quarters. The MPD skew is now positive for the first time in twelve months indicating a slight bias in market expectations toward lower rates in the near term. Market Probability Density Skew Ten Year Treasuries.2 -.2 -.4 -.6 -.8 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Banks and Insurance Companies Options on share prices of financial institutions generally traded at low volumes both relative to history and relative to two weeks ago. Share prices were uniformly lower for both banks and insurance companies. The average bank fell about -3.3% over the past two weeks while the average insurance company fell -3.6%. Tail risks, as measured by MPD standard deviations, moved higher as did MPD skews. This is the standard MPD behavior we witness when prices decline. 3. 2.5 2. 1.5 1..5. -.5 axp Changes in Market Probability Density Standard Deviation and Skew (CCAR Banks) bac bbt bk Change in Skew citi cof fitb gs jpm key ms pnc rf sti Percentage point change in Standard Deviation stt usb wfc Average Page 2 of 4
Additional Details: Trading in options on Deutsche Bank shares increased relative to our last report. We noted trading activity at strike prices well above and below the current spot prices (see graph below). At a smaller magnitude, we measured similar activity in options on Bank of New York Mellon shares (see report details). This trading behavior is consistent with higher tail risks and increased uncertainty about future price moves. Figure 1: Deutsche Bank Volumes Other commodity markets As the dollar continues to strengthen, commodity and currency futures spot prices continue to fall. The decline in grain prices has been dramatic. Year to date wheat has decline -16%, corn has declined -2% and soybeans have declined -25%. 4.% 2.%.% -2.% -4.% -6.% -8.% -1.% Two week Spot Price Changes on Select Commodities corn soybeans wheat cattle gold silver oil brent euro pound yen Additional Details: Page 3 of 4
In addition to the -8% spot price decline, tail risk in the Silver market increased substantially. The standard deviation of the MPD derived from options on futures prices increased by six percentage points to almost 2%. The MPD standard deviation derived from options on West Texas Intermediate Crude contracts with 6 months to expiry has increased notably since late July. This indicates an increase in tail risks in this market. Uncertainty of future Corn, Soybeans and Wheat prices increased. Standard deviations of the market probability densities increased by 1.9, 1.4 and.9 percentage points. However, the standard deviations of the MPDs remain well below typical levels. The skew of the market probability density of Soybeans is negative and has decreased to a long run low in the last two weeks despite the large price decrease. The impact of the Scottish referendum on the MPD derived from options on Dollar-Pound Futures has waned. The changes we reported two weeks ago have largely disappeared. The standard deviation of the MDP decreased and the skew of the distribution is much less negative. The market probability of a large decline in the Pound has dropped from 2.5% to.4%. Page 4 of 4
Inflation MPD Statistics as of October 1, 214 Median 1.37%.1% MPD Std Dev.84%.49% MPD Skew.3.86 Market Prob of Less Than 1% Inflation Market Prob of More Than 3% Inflation Inflation (1 Year Expiry) 2.2 1.37 1.72.83 2.5.61 33.87 33.87% 3.2% 11.88 3.53%.62% 18.71 3.53 Oct24 Oct1 Jun213 Apr17 Apr17 Inflation (2 Year Expiry) 1.37.75 2.92.84.83 2.75.3.77 2.5 Oct1 Last time higher 33.87 Aug213 5.88 57.45 Oct1 3.53 3.53 46.92 Median 1.69%.41% MPD Std Dev.9%.62%.89 MPD Skew.11.66 Market Prob of Less Than 1% Inflation Market Prob of More Than 3% Inflation 24.27% 1.4% 7.3%.48% 2.2 1.67 Nov7 1.11 Oct3.19.22 26.99 1.74 21.41 7.3 Dec26 Nov7 Inflation (5 Year Expiry) Aug21 47 month low Oct1 1.69 1.13 2.75.9.89 1.84.11.4 2.74 24.27 1.74 46.32 7.3 7.3 43.2 Median 1.98%.61% MPD Std Dev.95%.15%.91 MPD Skew.9.7 Market Prob of Less Than 1% Inflation Market Prob of More Than 3% Inflation 14.62% 2% 13.83% 1.5% 2.34 1.98 1.22.21.1 16.52 7.13 25.22 13.83 Oct1 Dec5 Dec5 Jul1 Oct1 Jun212 Oct1 1.98 1.64 2.83.95.91 1.89.9.22 1.39 14.62 7.13 31.67 13.83 47 month low 13.83 41.72 Source: Bloomberg Page 1 of 13
Equity, Bond, and Index MPD Statistics as of October 1, 214 Spot 1946.16 2.8% MPD Std Dev 11.76% 1.9% MPD Skew 1.23.3 Market Prob of 2% 6.8% 2.1% Volume 3451 27% Spot 1946.16 2.8% S&P 5 (6 Month Expiry) 21.57 1678.66 11.76 8.87.98 1.39 6.8 3.65 23412 Oct3 Nov27 Sep17 1946.16 48 month high 1131.42 21.57 Oct1 Last time higher 11.76 Sep213 8.87 24.27 Jul3 May29 S&P 5 (12 Month Expiry) 21.57 1678.66 17.87 MPD Std Dev 17.87% 2.8% 15.2 MPD Skew 1.21.77 Market Prob of 2% 1.5 1.57 13.79 13.44% 3.4% 1.2 Volume 11368 53% Spot 125.52 1.2% MPD Std Dev 2.5%.77% MPD Skew.4.21 Market Prob of 5% 2.58%.12% Volume 71534 16% 123271 Oct3 Oct3 Oct3 Jul3 1.23 1.52.86 Oct1 Last time higher 6.8 Sep213 3.65 17.56 Sep17 3451 13428 347919 1946.16 48 month high 1131.42 21.57 Oct1 Last time higher 17.87 Jun213 1.5 32.71 Jul3 May29 1 Year Treasury (3 Month Expiry) 126.9 122.97 2.82 2.17.4 1.62 Oct31.75 Nov14 5.31 71534 Apr3 Sep17 Mar213 Jul3 Oct1 Jun19 ishares US Real Estate Index (3 Month Expiry) 1.21 1.57.98 13.44 5.51 23.65 11368 3174 161766 125.52 122.97 126.9 last 12 months 2.5 2.17 2.82 last 12 months.4 12 month high.75.4 last 12 months 2.58 1.62 5.31 last 12 months 71534 5226 71534 last 12 months Spot 69.24 3.1% MPD Std Dev 7.63%.48% MPD Skew.63.24 Market Prob of 1% 1.2%.81% Volume 822 98% 74.31 62.1 9.75 5.22.52 1.55 15.31 4.45 72233 Dec12 Oct3 Oct3 Dec26 Aug21 Jul17 Jun5 Jul17 69.24 5.57 74.76 7.63 4.77 21.53.63 2.9.52 1.2 3.43 25.19 75 981 822 Source: Bloomberg, FactSet Page 2 of 13
Exchange Rate MPD Statistics as of October 1, 214 Spot 1.26 2.5% MPD Std Dev 3.85%.34% MPD Skew.4.13 Market Prob of 1%.72%.2% Volume 5823 14% Spot 161.65.7% MPD Std Dev 3.32%.81% MPD Skew.25.67 Market Prob of 1%.42% 2.1% Volume 1899 35% Dollar Euro Futures (3 Month Expiry) 1.39 1.26 4.45 2.4.2.37 1.51.2 79167 Nov27 Nov27 May1 Jul3 Aug21 May22 Jul3 Dollar Pound Futures (3 Month Expiry) 171.39 16.48 4.39 2.36.1.92 2.66.1 36353 Oct31 Jul3 Oct1 Aug212 Sep17 Sep1 1.26 1.22 1.48 3.85 2.4 9.19.4.85.2.72.2 13.1 5823 239 83954 161.65 15.8 171.39 Sep1 Last time higher 3.32 Jul213 2.36 6.96 Aug14.25 42 month low.92.1 Last time higher.42 Jul213.1 8.51 Aug14 Dollar Yen Futures (3 Month Expiry) 1899 14 36353 Spot 91.64 1.1% MPD Std Dev 4.45%.42% MPD Skew.17.76 Market Prob of 1% 1.26%.43% Volume 11468 2% 12.88 91.64 5.65 2.76.34.8 3.83.2 2676 Oct3 Oct3 Nov14 Oct3 Feb6 Jul3 91.64 42 month low 91.64 13.66 Oct1 4.45 2.76 8.2.17.44.91 1.26.2 1.78 36 425 11468 Source: Bloomberg Page 3 of 13
Metal and Energy Commodity MPD Statistics as of October 1, 214 Spot 1216.32 1.7% MPD Std Dev 11.44% 1% MPD Skew.36.39 Market Prob of 2% 5.38% 1.4% Volume 5391 33% Gold (6 Month Expiry) 1352.4 1213.8 14.83 9.39.2 2.39 Dec26.53 Oct3 9.42 Oct3 31121 Mar6 Silver (6 Month Expiry) Jul1 Sep4 1216.32 1213.5 1859.2 11.44 9.39 23.3.36.71.25 5.38 2.39 21.3 5391 691 9355 Spot 17.31 7.8% 22 17.31 22.33 MPD Std Dev 19.69% 6.1% 13.16 MPD Skew.57.46 Market Prob of 2% 14.25% 6.6% Volume 6978 19%.15.57 18.9 6.54 9415 Oct3 Oct3 17.31 17.31 48.61 Oct1 Sep1 Jul1 Oct1 Jun213 West Texas Intermediate Crude (6 Month Expiry) 19.69 13.16 4.41.57.63.15 14.25 6.54 32.41 6978 134 2797 Spot 88.34 3.6% MPD Std Dev 13.52% 1.6% MPD Skew.41.11 Market Prob of 2% 8.3% 2.1% Volume 3275 65% 12.41 88.34 14.53 1.25.1.61 9.5 3.65 85645 Nov27 Nov14 Oct3 Jun19 Oct1 Apr213 Jun19 88.34 79.47 114.82 13.52 1.25 34.41.81 8.3 3.65 26.43 165 18997 3275 Source: Bloomberg Page 4 of 13
Agricultural Commodity MPD Statistics as of October 1, 214 Spot 334.65 5.5% MPD Std Dev 16.36% 1.9% MPD Skew.21.2 Market Prob of 2% 1.46% 1.5% Volume 45343 15% Corn (6 Month Expiry) 513.25 334.65 21.43 12.43.31.19 18.97 5.73 21666 May8 Apr3 Apr3 Soybeans (6 Month Expiry) 334.65 334.65 823.75 Oct1 Sep24 16.36 12.43 29.14.21.19.36 1.46 5.73 29.69 45343 659 472954 Spot 934.57 6.4% MPD Std Dev 13.9% 1.4% MPD Skew.48.18 Market Prob of 2% 8.27% 1.6% Volume 3527 97% 1331.75 934.57 15.76 1.93.17.5 1.49 4.7 238213 Feb2 Apr17 Apr3 Apr17 Wheat (6 Month Expiry) 934.57 934.57 1691.25 Oct1 Sep24 13.9 1.93 23.7.48.5.75 8.27 4.7 22.49 3527 679 326132 Spot 492.72 4.6% MPD Std Dev 15.47%.91% MPD Skew.14.37 Market Prob of 2% 1.43% 1.4% Volume 6918 19% 743.75 492.25 21.56 12.95 Dec12.4 Oct3.3 19.59 5.67 46977 Dec12 May8 Mar2 Jun12 Mar2 Cattle (3 Month Expiry) 492.72 492.25 93 Sep24 15.47 12.95 28.19.14.1.54 1.43 5.67 29.32 6918 362 51689 Spot 163.57 1.8% MPD Std Dev 8.29% 2.1% MPD Skew.53.1 Market Prob of 5% 24.4% 5.4% Volume 16352 45% 163.57 129.5 8.29 3.6.17.94 24.4 8.46 3385 Dec12 Jan9 Jan9 Jan9 May8 Oct1 163.57 15 month high 129.5 163.57 Oct1 15 month high Oct1 15 month high last 15 months 8.29 3.6 8.29 last 15 months.53.94.17 last 15 months 24.4 8.46 24.4 last 15 months 1263 3385 16352 last 15 months Source: Bloomberg Page 5 of 13
Bank MPD Statistics as of October 1, 214 MPD Standard Deviation (3 Month Expiry) American Express 1.21% 1.1% Bank of America 11.95% 1.2% BB&T 8.65%.55% Barclays 13.7%.17% Bank of NY Mellon 1.27%.88% Citigroup 11.12% 1.4% Capital One 9.22%.6% Credit Suisse 1.78% 2.9% Deutsche Bank 12.78%.35% Fifth Third 11.74% 2.4% Goldman Sachs 1.21%.87% JP Morgan 9.61%.86% Keycorp 12.44% 1.4% Morgan Stanley 12.43% 1.2% PNC Financial 9.13% 1.3% Regions Financial 12.3%.76% SunTrust 11.24%.93% State Street 1.54% 1.4% UBS 1.4%.46% US Bancorp 8.98% 1.6% Wells Fargo 9.17% 1.4% 11.12 7.82 13.68 1.22 1.43 7.29 28.84 11.86 11.92 7.88 13.39 8.52 11.94 7.72 16.53 9.84 15.1 11.33 15.13 8.21 13.52 8.23 11.72 7.41 13.36 9.76 15.7 1.11 1.64 7.45 15.99 1.57 13.8 8.87 12.4 8.73 19.2 8.7 9.27 6.58 1.94 7.16 Oct3 Oct3 Oct3 Oct3 Oct3 Nov27 Oct3 Oct31 Oct3 Oct3 Oct3 Oct3 Oct3 Oct3 Feb6 Feb6 Aug21 Jul3 May1 May22 May1 Apr17 Mar6 1.21 7.82 24.5 11.95 1.22 44.7 8.65 7.29 27.58 13.7 11.86 42.39 Sep24 Jun19 Jul3 Jul3 Sep1 Sep1 Aug21 1.27 7.88 27.34 11.12 8.52 33.38 9.22 7.72 29.49 1.78 9.84 34.13 12.78 11.33 41.68 11.74 8.21 3.73 1.21 8.23 31.2 9.61 7.41 3.37 12.44 9.76 35.48 12.43 1.11 41.77 9.13 7.45 26.31 12.3 1.57 39.37 Sep4 Sep24 Aug7 Jun5 11.24 8.87 34.43 1.54 8.73 27.95 1.4 8.7 39.87 8.98 6.58 26.1 7.16 28.37 9.17 Source: FactSet Page 6 of 13
Bank MPD Statistics as of October 1, 214 MPD Skew (3 Month Expiry) American Express.55.65 Bank of America.33.83 BB&T.25.34 Barclays.66.94 Bank of NY Mellon.79.19 Citigroup.4.87 Capital One.38.38 Credit Suisse.26.94 Deutsche Bank.58.3 Fifth Third.73.83 Goldman Sachs.86.77 JP Morgan.65.33 Keycorp.55.8 Morgan Stanley.57.26 PNC Financial.37.41 Regions Financial.19.18 SunTrust.39.37 State Street.22.46 UBS.25.29 US Bancorp.59.27 Wells Fargo.79.34.21.62.2.51.25 1.54 1.94 1.11.14 1.9.23.75.24.81.72 2.35.95.3 1.4.36.96.33.75.28 1.36.26.67.37 1.29.3 1.4.34 1.5.13.81.45 3.36.31 1.3.42.83 Oct3 Nov14 Dec26 Jul1 Oct1.55 1.32.21.33 1.17.2 Last time higher.25 Oct212 1.54.15 Sep24 Sep213 Aug7 Jul1 Aug7 Apr24 May1 May1 Sep1 Jun12 Jun5 Sep24 Aug212 Jul17 Sep24 Jun213 May15 Sep1 Aug212 Aug7 Jun19 Oct1 Sep1 Aug14 May15.66 1.97 1.94.79 1.56.14.4 1.23.63.38 1.38.24.26 48 month high 2.7.72.58 1.31.35.73 1.45.3.86 1.38.34.65 1.44.33.55 2.24.4.57 1.2.25 Last time higher.37 Apr211 1.51.7 May8 Aug14 Sep24 Mar213 Aug7 May15 Sep24 Jun213.19 1.94.1.39 1.16.18.22 1.28.13.25 3.36.97.59 1.45.31 1.73.42.79 Source: FactSet Page 7 of 13
Bank MPD Statistics as of October 1, 214 Market Probability of 2% (3 Month Expiry) American Express 4.18% 1.2% Bank of America 5.48% 1.4% BB&T 1.84%.45% Barclays 6.45%.49% Bank of NY Mellon 4.17%.61% Citigroup 4.87% 1.6% Capital One 2.73%.11% Credit Suisse 4.98%.84% Deutsche Bank 7.17%.41% Fifth Third 5.74% 2.5% Goldman Sachs 4.32%.87% JP Morgan 3.71%.91% Keycorp 5.73% 1.4% Morgan Stanley 6.51%.99% PNC Financial 2.67%.71% Regions Financial 5.9%.11% SunTrust 5.68% 1.3% State Street 3.35%.66% UBS 3.58%.49% US Bancorp 2.75% 1.2% Wells Fargo 3.35% 1.3% 5.31 1.53 7.21 3.13 6.15 1.82 16.71 5.5 6.89 1.72 7.58 1.93 6.41 1.64 12.84 3.77 1.3 4.99 9.25.99 8.49 1.79 6.72 1.31 8.33 2.82 1.14 3.79 5.41 1.43 11.22 4.26 7.24 1.73 7.16 2.23 18.15 2.28 3.56.74 5.3 1.3 Oct3 Oct3 Oct3 Nov27 Oct3 Oct31 Oct3 Oct3 Oct3 Feb6 Feb6 Feb6 Feb6 Feb6 Jul3 Aug21 Sep24 May15 May1 Aug7 Jun19 Jun5 May8 Apr17 Mar6 Feb6 Jul3 Aug21 Sep4 Sep1 Jan213 Sep4 Jun5 Sep24 4.18 1.53 17.67 5.48 3.13 27.24 1.84 1.82 34.9 6.45 5.5 3.94 4.17 1.72 21.34 4.87 1.93 24.59 2.73 1.64 21.29 4.98 3.77 28.61 7.17 4.99 29.63 5.74.99 27.19 4.32 1.79 21.46 3.71 1.31 2.52 5.73 2.82 27.26 6.51 3.79 26.47 2.67 1.43 17.91 5.9 3.64 29.69 5.68 1.73 26.4 3.35 2.23 19.69 3.58 2.28 27.33 2.75.74 18.85 1.3 2.71 3.35 Source: FactSet Page 8 of 13
Bank MPD Statistics as of October 1, 214 Volume (3 Month Expiry) American Express 491 17% Bank of America 16968 68% BB&T 3 96% Barclays 75 14% Bank of NY Mellon 425 61% Citigroup 5384 7.4% Capital One 53 9% Credit Suisse 19 24% Deutsche Bank 227 48% Fifth Third 142 2% Goldman Sachs 22 82% JP Morgan 3344 37% Keycorp 1 83% Morgan Stanley 1756 79% PNC Financial 27 79% Regions Financial 217 93% SunTrust 457 69% State Street 79 92% UBS 1% US Bancorp 173 57% Wells Fargo 6985 59% 11926 132589 649 1111 15678 78527 9311 411 7411 15351 2184 52517 278 19794 481 4635 4232 5339 2766 5746 121351 491 623 2341 16968 7419 36316 3 3 693 75 29 1528 425 59 1791 5384 114 284278 53 53 38646 19 1421 227 62 29575 142 28 19324 22 296 43413 3344 943 119246 1 66 7627 1756 327 84281 27 118 12224 217 2 19649 457 61 13788 79 42 537 652 173 133 2921 95 16782 6985 Source: FactSet Page 9 of 13
Insurance Company MPD Statistics as of October 1, 214 MPD Standard Deviation (3 Month Expiry) Aflac 9.98%.49% AIG 1.62% 1.1% Allstate 8.24%.55% Ameriprise 11.4% 1.5% Chubb 7.2%.43% Hartford Financial 1.8%.76% Lincoln National 13.32%.25% Met Life 12.12% 1.6% Principal Financial 14.77% 3.3% Progressive 1.65%.2% Prudential 11.97% 1.5% 11.93 7.29 13.72 8.7 11.13 5.83 13.7 9.76 8.63 6.43 13.87 8.68 15.41 1.28 13.71 1.8 19.4 8.31 11.32 6.2 14.32 1.11 Oct3 Oct3 Oct3 Oct3 Oct3 Oct3 Nov14 Jan9 Oct3 May8 Mar2 Aug21 May29 Sep4 Jul1 9.98 7.29 28.3 1.62 8.7 34.63 8.24 5.83 22.82 11.4 9.76 28.12 7.2 6.43 18.33 1.8 8.68 34.59 13.32 1.28 35.56 12.12 1.8 31.28 14.77 8.2 34.89 1.65 6.2 24.84 1.11 3.6 11.97 Source: FactSet Page 1 of 13
Insurance Company MPD Statistics as of October 1, 214 MPD Skew (3 Month Expiry) Aflac.39.61 AIG.44.66 Allstate.89.12 Ameriprise.37.79 Chubb.72.65 Hartford Financial.78.19 Lincoln National.42.78 Met Life.54.85 Principal Financial.16 1.4 Progressive 1.3.2 Prudential.47.25.32.94.28.91.31 1.19.32 1.59.21 1.2.16.96.15 1.19.31.89.2 2.95.36 2.37.36.94 Jan9 Nov27 Feb6 Jun19 Aug14 May15 Aug14 Jul17 Sep17 Nov211 May1 Sep17 Aug211 Aug7 May15 May1 Jul1.39 1.24.32.44 1.25 1.25.89 1.39.12.37 4.3.33.72 1.56.21.78 1.7.16.42 1.59.15.54 1.52.23.16 2.95.24 1.3 3.54.71 1.45.36.47 Source: FactSet Page 11 of 13
Insurance Company MPD Statistics as of October 1, 214 Market Probability of 2% (3 Month Expiry) Aflac 3.55%.46% AIG 4.7% 1% Allstate 2.48%.25% Ameriprise 5.63% 1.8% Chubb 1.47%.47% Hartford Financial 3.48%.52% Lincoln National 7.53%.11% Met Life 6.27% 1.9% Principal Financial 11.25% 4.9% Progressive 8.74% 1.3% Prudential 6.1% 1.6% 6.5 1.39 7.4 2.44 6.8.56 9.69 3.62 2.72.64 1.32 2.19 1.3 3.85 8.8 3.79 18.82.43 8.74 9.91 3.99 Oct3 Oct3 Oct3 Oct3 Oct3 Feb6 Jul3 May22 Feb6 Feb6 Dec26 Oct3 Sep1 Aug14 Jul17 Jul1 Oct1 3.55 1.39 2.31 4.7 2.44 25.58 2.48.56 18.62 5.63 3.62 22.78 1.47.64 14.62 3.48 2.19 23.29 7.53 3.85 27.65 6.27 3.79 2.81 11.25.43 28.98 Last time higher 8.74 Jan213 39.73 3.99 22.23 6.1 Source: FactSet Page 12 of 13
Insurance Company MPD Statistics as of October 1, 214 Volume (3 Month Expiry) Aflac 73 94% AIG 331 5% Allstate 154 12% Ameriprise 66 51% Chubb 47 88% Hartford Financial 436 51% Lincoln National 172 2.8% Met Life 395 96% Principal Financial 14 6% Progressive 4 Prudential 843 52% 13232 38744 578 1114 2541 13441 843 14685 36 474 13225 73 541 22718 331 432 13998 154 71 68926 66 5 1317 47 43 11114 436 198 37285 172 51 1682 395 319 161416 14 2 3846 4 4335 222 13225 843 Source: FactSet Page 13 of 13