Bank of America Merrill Lynch analysis of VIX term structure implying 1.4% move on 2016 US election

Chart 13: The 2016 election move implied by the VIX term structure is, in our estimate’, approx. 1.4%... ---0--- Interpolated Oct future (level where Sep/Oct/Nov Fly = 0) —2e— Expected Oct future based on median level of ~1M/2M/3M fly em=@=—= \//X futures (adjusted for holidays) Excess vol vs 6.6 median levels Implied daily move on election day = 1.4% vs. a typical realized Bf "election day" move of 1.5% (see 19 Chart 14) 46 “Sept6 Oct 16 Novi6 Source: BofA Merrill Lynch Global Research. Daily data from 2-Jun-09 to 5-Aug-16. *Day count adjustment = we adjust the VIX futures curve to reflect the Trade-Day/252 day-count convention and use SQRT ((30/365*252/T}) as the adjustment factor to convert to the common day-count convention used in variance swaps. Term-structure adjustment = we add the median level of the day- count adjusted generic 1m/2m/3m fly (ie. -0.5x Sep fut. +1xOct fut. -0.5x Nov fut) to take into account the usual VIX term structure. Chart 14: ..which is notably very close to the typical SPX daily realized move post-elections since 1928 6.0% 5.0% 4.0% Implied move around 2016 “ election day (see Chart 13) 3.0% 2.0% 1.0% 0.0% ONO OCOTAONOOGAON CODA OA COA ON CO VROFY TO OSGSORN SSOARDSGOTS Prerrrrrrrrrrrrrrrrrr,rrr,rr,rs, ooooooco ooocooooooocoeocCoCoono ) 42aza2za2e22222222222 22222222 BDOAMOANRNTHAMON NH KDAMDONR ANH D mam Abs. post election day SPX realized move ====Average from 1928 to 2012 Source: BofA Merrill Lynch Global Research. Data from Nov-28 to Aug-16. Using the VIX term structure in the Sep/Oct/Nov buckets and adjusting for term structure/day convention (see footnote to Chart 13), we estimate the option markets’ implied move over a single day in the Oct-Nov period (which encompasses the US election on 8-Nov). Our estimated implied move is 1.4% which is notably very close to the typical 1-day post-election day SPX realized move over past election cycles (1.5% since 1928) (see Chart 14). Importantly, there is a larger-than-typical variation in the distribution of all daily post-election SPX returns (34.0 vol pts vs. 18.4 vol pts for daily SPX returns since Jan-1928), with the largest and the fourth largest daily post-election SPX returns since 1928 occurring in the last two election cycles alone (see Chart 14). Hence, investors who believe this /s not your typical election (to quote President Obama at the latest Democratic National Convention) may still find that option markets are currently pricing too little of a move. However, as we have recently argued the debate about whether a Trump win would be good or bad for markets coupled with the inability to exactly pinpoint real risks are likely headwinds to a sizeable market shock. 8 Global Equity Volatility Insights | O09 August 2016 BankofAmerica <2” Merrill Lynch HOUSE_OVERSIGHT_025985