Chart 27: Both HSCEI and NKY term structures are near record steeps; Calendar puts are attractively priced given the steep term we favor calendar puts to hedge downside risks structure 15% ° With the continuous low realized volatility environment, both ; NKY and HSCEI 3-month minus 12-month term structures 10% + steepened to -3.7 vol points, which are near multi-year lows. 5% | i As our strategists think the Fed now appears concerned about q | | surging asset prices, investors should consider downside a, CM A Pi bf afenaeee em ee Wr hedges. Calendar puts, i.e. buying short-dated ATM puts and ° > i” WF) h W yt Nay i cel selling long-dated OTM puts, are attractively priced given the Ls -_ L uh steep term structure. -5% S82e2rirsgVveerrTeseeseset Currently, we still have an open trade on NKY calendar puts (buy SSeS eS8 SG SG5ESES HESS Jul-17 19,500 puts vs sell Dec-17 17,500 puts) to hedge ——NKY 3M-12M ATM Vol ~=———HSCEI 3M-12M ATM Vol downside risks. Source: BofA Merrill Lynch Global Research Data as of 2-Jan-09 to 16-Jun-17 Chart 28: The Nikkei/Topix ratio and its volatility is capped with the The Bo}’s ongoing yield curve control has capped the Bo'songoingyieldcurvecontrol Nikkei/Topix ratio and its volatility -0.6 12.9 043 Japanese government bond (JGB) yield has been on a downward s 127 02 3 trend over the last few years and has negatively impacted bank rr 125 0 = earnings. As the Topix has higher weightings in banks than the = 193 02 = Nikkei, the NKY/TPX ratio has been grinding higher. >< 04 2 ; ; a 12.1 06 8 However, the NKY/TPX ratio appears to have flattened out since = 11.9 08 3 the Bo}’s commitment to maintain the 10-year JGB yield at 2 447 4 Fs around 0% in September 2016. With global central banks 15 12° increasingly advocating tighter monetary policies, the market NANA MOT YT TH WOOK , may start to speculate Bo)’s exit strategy and this may reverse eg 8 5 S25 8 8 & Pes NKY/TPX’s upward trend. With TPX vol trading below NKY vol, on oN a = ao buying TPX ca