BofA Merrill Lynch Nikkei Options Trade Outlook Tied to US Yield Squeeze and BOJ Policy

A further squeeze in US and Japanese yields is most positive Japan in Asia The strong US NFP print and the large Japan fiscal plan catalysed a global selloff in bonds. Chart 31 shows that NKY is the most sensitive Asian market to rising USD & JPY yield since 2010 with a correlation of 31%. Buy 1x NKY Oct 17500 call, short 0.65x Sep 17250 call: Gamma neutral, long vol Given the low market expectation in the BO) and a potential rally in Japanese equities on the back of further yield squeeze and rising BO) expectation next month, we like owning 1x NKY Oct 17500 call vs. selling 0.65x of Sep 17250 call have a positive 9% delta, 8bps of vega and flat gamma & Indicative pricing (As of 8-Aug-16, Ref: 16650) Buy 1x NKY Oct 17500 call: Sell 0.65x NKY Sep 17250 call: Net Chart 30: Current NKY Sep-Oct ATM volatility is cheap relatively to implied volatility going into previous BO) meetings in 2016 for 0.7% (¥116). The trade will theta initially. 1.13% (¥187) (iv: 19.2, delta: 24%, gamma: 3.8%} 0.66% (¥110)} (iv: 16.9, delta: 23%, gamma: 5.9%) 0.70% (¥116) (delta: +9, vega: 0.08%) Chart 31: The Nikkei is the most sensitive to rising USD and JPY rates among Asian indices 9 — i 40% “ha — ach boa : ee) Correlation of Index vs. 10Yr USD & JPY Rates 3, 40, 1 a= Jul16BOU Current SepOct Vol 30% (¢] 35% 30% 29% Front Month ATM Vol before BOJ 20% -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 6 -5 -4 -3 -2 Number of Trading Days before BOJ Source: BofA Merrill Lynch Global Research 17.0% 17.2% 20% 16.5% 10% 0% -1.7% “10% ----6:5% NIFTY KOSPI2 HSCEl TWSE HSI AS51 NKY “1 m Correlation of Index vs. 10Yr USD & JPY Rates Source: BofA Merrill Lynch Global Research. Weekly correlation since 2010 Chart 32: Mark-to-Market of the long 1x NKY Oct 17500 call, short NKY Sep 17250 call structure 400 300 200 100 Mark-to-Market in Yen Q Q Q Ww 5100 5200 5300 5400 5500 5600 5700 5800 5900 6000 6100 6200 6300 6400 6500 6600 6700 6800 6900 7000 7100 7200 7300 7400 7500 7600 7700 7800 7900 8000 8100 8200 8300 8400 8500 8600 8700 8800 8900 9000 Source: BofA Merrill Lynch Global Research Assume volatility stays constant Buy NKY Oct 17500C, Short 0.65x Sep 17250 (At Inception) Buy NKY Oct 17500C, Short Oo 65x Sep 17250C (1day Before Sep expiry) 16 Global Equity Volatility Insights | O09 August 2016 BankofAmerica <2” Merrill Lynch HOUSE_OVERSIGHT_025993