Fwd: Russia

Rich,

For a bearish Russia view in the medium term (without having an ISDA), you could buy puts on RSX — VanEck Vectors Russia ETF. Russian equities are highly correlated to RUB (chart below).

Buy a RSX vanilla put

• RSX 19-May 2017 expiry ATM strike costs about —12.4% premium

Buy a RSX put spread

• RSX 19-May-2017 18x12 put spread (97% = 65% strikes) costs - $1.60 or 8.9% on the 18-strike leg (3.75x max gross payoff). You're not saving that much by spreading it, so I prefer the vanilla. We looked at pricing contingent options but liquidity is poor.

If there is another market that you're also bearish, we could look to cheapen the premium with a best-of-put (eg. Best-of-put on Russia and China). Digitals and contingent options didn't price well due to liquidity.

While optionality isn't cheap, the trade looks interesting as this is not yet a consensus view. Our strategists and much of the Street is constructive RUB given a hawkish central bank, decent carry and stronger oil. Russia's central bank governor reiterated that monetary policy should be focused on maintaining positive real rates, with equilibrium she says around 2.5-3% in the longer term. Before achieving 4% inflation target, she says real rates will be kept higher. Reads as hawkish and supportive for RUB in the short term, as positive real rates should support capital flows.

RUB vs MICEX (Russian equity index)

Russia is —4% of EM ETFs VWO and EEM

More EM inflows: A large creation in Vanguard FTSE EM ETF (VWO)

Source: Bloomberg

Amanda Ens
Director
Bank of America Merrill Lynch
Merrill Lynch, Pierce, Fenner & Smith Incorporated
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still waiting on feedback from vahe and paul barrett..

Richard Kahn
HBRK Associates Inc.
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