Chart 23: Steep put skew in FXB, the ETF underlying GBP, favors buying downside protection via cheap put spreads against the odds of a hung parliament outcome in the UK general election The UK general election is scheduled to take place on Thu, 8- 50% 4% Jun-17. When the election was called on 18-April, the polls 45% pointed to a landslide victory for the Conservative Party. This 40% 3% boosted the Uk’s currency as investors assumed that such an fe} ‘s ae [ outcome would lead to a “smoother” Brexit. Indeed, on that day 75% A 2% the Sterling (GBPUSD) recorded its third best daily performance 20% 4 | over the past 8 years. 15% 4 Mey Pe 10% ee em sttncel snap 1% However, while official polls still suggest an outright majority 5% ; for the Conservative Party, the odds of a hung parliament have Om a a a Os increased in recent weeks. As a consequence the boost in the es 2 a SS 8 z 2 4S currency after the election was called has slightly faded. With >? fw Bs 20 27> u = ts significant further downside room to its recent pre-rally lows A-B 5d MA (RHS) : Ar wi ‘m Sterling (EXB) 95% implied vol (A) and FX markets complacent with prevailing opinion poll data, == 1m Sterling (FXB) ATMf implied vol (B) there clearly could be a significant near-term correction in the Current sterling if the probability of a hung parliament becomes reality. Source: BofA Merrill Lynch Global Research. Daily data from 5-Jun-16 to 6-Jun-17. Hence we favor hedging downside risk in sterling via cheap FXB put spreads to lever steep put skew (3m 95%-ATMf implied vol spread at its 1-yr 90" %-ile). Table 2: Current S&P500 volatility and correlation measures relative to the prior two year of historical daily data 1-week change Over 2-year historical period 2Jun17 26May17 Change a Minimum 25% Median 75% = Maximum 1-month ATM implied volatility TA% 16% -0.2% 0.1% TA% 10.0% 11.8% 14.5% 31.8% 1-year ATM implied volatility 13.8% 13.9% -0.1% 2.5% 13.4% 15.4% 16.2% 17.3% 22.5% 1-week intraday realized volatility 6.