Options Risk Statement
Potential Risk at Expiry & Options Limited Duration Risk
Unlike owning or shorting a stock, employing any listed options strategy is by definition governed by a finite duration. The most severe risks associated with general options trading are total loss of capital invested and delivery/assignment risk, all of which can occur in a short period.
Investor suitability
The use of standardized options and other related derivatives instruments are considered unsuitable for many investors. Investors considering such strategies are encouraged to become familiar with the "Characteristics and Risks of Standardized Options" (an OCC authored white paper on options risks). U.S. investors should consult with a FINRA Registered Options Principal.
For detailed information regarding the risks involved with investing in listed options: http:/Awww.theocc.com/about/publications/character-risks.jsp.
Valuation & risk
Brazil (BRAZIL)
We are Marketweight Brazil's EXD with currently wide spreads compensating for the risks. The political crisis concerns investors and growth has been weaker than expected. However, spreads are quite high compared to LatAm investment grades. There are positive and negative tail risks for growth, as a resolution to the political paralysis could bring confidence back up quickly and improve the economic backdrop. With this positive tail risk, and a stronger fiscal adjustment in 2016, economic recovery could start in 2Q16. On the downside, pressures on GDP could increase if the political scenario deteriorates further, with the government failing to approve fiscal measures and/or Brazil shifting to a heterodox policy.
Colombia (COLOM)
Spreads, which have widened this year adequately compensate investors for the risk, in our view, and leads us to our Marketweight view. Downside risks are a rapid inflation acceleration from pass-through effects, which would be a difficult problem for macroeconomic policy. Also oil price weakness raises risk of recession. Fiscal and external difficulties generate incentives to relax the fiscal rule. Upside risks are a rise in commodity prices and stronger than expected growth.
Mexico (MEX)
Mexico's tight spreads fairly reflect the better quality of Mexican debt compared to most of LatAm, in our view. We forecast Mexico's activity growth to remain in the 2-3% range. Downside risks are lower growth in the US, lower oil prices and slower domestic oil production. A disorderly normalization of US monetary policy is a risk to Mexico's financial stability as well. Upside risks are higher oil prices and stronger US growth.
Turkey (TURKEY)
We are Overweight as Turkey Eurobonds lagged peers due to heightened political noise during the summer. Since Moody's downgraded the sovereign, all negative impact of the attempted coup seems to be priced and we think that bonds offer value vs peers. Downside risks are stronger outflows than expected and heightened political noise. Upside risks include a generalized rally on the back of more positive global backdrop.
Analyst Certification
We, David Woo, Adarsh Sinha, Arko Sen, Claudio Irigoyen, Jane Brauer, Kamal Sharma, Mark Capleton, Paul Ciana, CMT and Ralf Preusser, CFA, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
Bankof America
Merrill Lynch Global Rates, FX & EM 2017 Year Ahead | 16 November 2016 53
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