LBMA/LPPM Precious Metals Conference
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Signposting
Options for Outperformance
Managing the challenges of duration and
volatility in Gold
Unrestricted distribution
2013 – A Year of Extremes in Volatility Trading
 We can summarise an options market through: At the money volatility
curve, volatility smile, correlation
 Within 3 weeks at the start of April the range in 1m implied volatility
exceeded the full year range for 2012 (10.5% to >30%). Volatility curve
term structure dramatically changed
 Skew for puts reached all time highs as price fell below $1200 usd/oz (1y
25 delta risk reversal* reached -4%)
 Correlation between Gold and other assets broke down, and safe haven
flows were brief but sometimes aggressive (Cyprus, Syria)
 All of the above has led to an options trading environment that has been
both challenging and potentially rewarding
* See appendix 2
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LBMA/LPPM Precious Metals Conference
9/30/2013
1m and 1y Implied Gold Volatility (Jan 2012 – Present)
Gold Implied Volatility
30
Implied volatility (%)
25
20
15
10
5
2012
Jul
2013
Jul
Date
XAUUSDV1M
XAUV1Y
Source: Barclays.
3 | Options for Outperformance | 10 September 2013
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1y 25 Delta Risk Reversal and Spot (Jan 2011 –
Present)
1y 25d RR
6
1,900
1,800
4
2
1,600
1,500
0
Gold spot price
1y 25 delta risk reversal (%)
1,700
1,400
(2)
1,300
(4)
1,200
2011
2012
2013
Date
Source: Barclays.
XAU25RR1Y
XAU
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LBMA/LPPM Precious Metals Conference
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Options – Who and Why?
Market Participants
Options Use
Yield
Enhancement

Directional
Views

Volatility
Trading

Portfolio
Hedging


Tail Risk
Hedging
Financial
Planning










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Tail Risk Hedging
 Portfolios holding long equities have performed well this year
 Cypriot default threatened to derail the equity rally in March 2013
 Gold’s correlation with risky assets, including equities, flipped to negative
during Cypriot default*1. Implied volatility and skew in risky assets
increased
 Implied Gold volatility had reached a multiyear low, and skew was better
offered for calls during Q1. Out of the money Gold calls were a cheap
hedge*2
1. See Slide 7
2. See Slide 8
6 | Options for Outperformance | 10 September 2013
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LBMA/LPPM Precious Metals Conference
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Tail Risk Hedging – Gold vs Aud/Usd Correlation
10 day Correlation: Gold vs Aud Usd
1.5
1.0
Correlation
0.5
0.0
(0.5)
(1.0)
2013
Mar
May
Jul
Sep
Correlation (R(XAUUSD);R(AUDUSD);108)
Date
Source: Barclays.
7 | Options for Outperformance | 10 September 2013
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Tail Risk Hedging: 3m 10 Delta Call Implied
Volatility
3m 10d Call Volatility
30
Implied volatility (%)
25
20
15
10
2012
Jul
2013
Jul
Date
XAU10CV3M
Source: Barclays.
8 | Options for Outperformance | 10 September 2013
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LBMA/LPPM Precious Metals Conference
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Yield Enhancement – Multi Asset Investment (MAI)
 Deposit rates for Precious Metals holdings are close to zero.
 1m Gold deposit: +0.30%
 1m Silver / PGM deposits: <0.00%
 Clients can deposit metal and sell an embedded call option to generate a
positive coupon for the period
 They will receive their deposit back in the form of metal (if option is not
exercised), or in the form of counter currency (if option is exercised)
 Yield is affected by: basic yield, maturity, implied volatility, strike price,
forward price, upfront payment, risking coupon
9 | Options for Outperformance | 10 September 2013
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Yield Enhancement – Multi Asset Investment (MAI)
* Source: BARX Live, Barclays.
10 | Options for Outperformance | 10 September 2013
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LBMA/LPPM Precious Metals Conference
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Conclusion and Opportunities
 Many different market participants can benefit from the use of options to
improve returns or reduce risk
 2013 has shown that clients can benefit from the long and short side of
options on Precious Metals (Q1 vs Q2)
 A more volatile environment presents greater risks that can be mitigated
and greater opportunity that can be captured through options
11 | Options for Outperformance | 10 September 2013
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Appendix 1 – Contacts and References
 Charts are sourced from OASIS: A Barclays analytical volatility tool
 Pricing screens are sourced from BARX LIVE: Streaming options pricing in
Precious Metals (including MAI)
 Barclays sales contacts:
– Bruce Craven (Asia): [email protected]
– Michael Nartey (EMEA): [email protected]
– Troy Black (Americas): [email protected]
– Jon Spall (Precious Metals): [email protected]
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Appendix 2 – 1 year 25 delta risk reversal
 25 delta call implied vol –
25 delta put implied vol =
25 delta risk reversal
BARX PICTURE HERE
 Provides a measure of
skew for each tenor along
the volatility curve
* Source: BARX Live, Barclays.
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Disclaimer
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| Options©for
Outperformance
| 10PLC,
September
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