Guide to the CBOE / CBOT 10 Year Treasury Note Volatility · 2016-09-08 · OZN options expiring at 4:00 p.m. on 11/21/2014 and on 12/26/2014. Note that the CME calls these December

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Guide to the CBOE / CBOT 10 Year Treasury Note Volatility Index (TYVIXSM Index)

Part I: Introduction to the TYVIX Index

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Copyright © 2015 CBOE. All rights reserved. CBOE Proprietary Information

Table of Contents

I. Introduction to the TYVIX Index

II. Index Calculation

III. Conversion to TYVOL, a Yield Volatility

IV. Salient Features

1. Descriptive Statistics of TYVIX and VIX®

2. Empirical Properties of TYVIX Time Series

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I. Introduction to the TYVIXSM Index This is the first module of CBOE’s Handbook to TYVIX futures. It describes the calculation and salient features of the CBOE/CBOT 10-Year U.S. Treasury Note Volatility Index (TYVIXSM). The second module, called “TYVIX Futures Primer”, describes TYVIX futures and their basic empirical properties, and the third module, called “Compendium of Empirical Findings” presents additional empirical facts about the index and the futures.

The TYVIX Index in a Nutshell

The TYVIX is the first exchange-traded volatility benchmark for U.S. Treasuries. Similar to the CBOE Volatility Index® (VIX® Index), TYVIX measures expected percentage changes in its underlying over a one-month period. The underlying is CBOT futures on 10-year Treasury Notes (ticker TY). TY futures are the most actively traded U.S. Treasury futures, and their volatility is aligned with the volatility of a variety of fixed income assets, such as spot Treasuries, interest rate swaps, mortgage-backed securities, and corporate bonds. TYVIX is calculated every 15 seconds from 7:00 am to 3:15 pm Central time and is disseminated to data vendors under the ticker TYVIX. Figure 1. TYVIX and the 10-Year Treasury Yield, 2003- 2014

Source: CBOE, Federal Reserve Board

0 2 4 6 8 10 12 14 16

0%

1%

2%

3%

4%

5%

6%

1/2/03 1/2/04 1/2/05 1/2/06 1/2/07 1/2/08 1/2/09 1/2/10 1/2/11 1/2/12 1/2/13 1/2/14

TYVIX

10 Year Trea sury Yiel d

10-Year Treasury Yield TYVIX

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The historical series of TYVIX from 2003 to 2014 (Figure 1) shows that the index reacts strongly to sudden and extreme variations in the 10-year constant maturity Treasury yield.

II. Index Calculation TYVIX is an estimate of the expected 30-day volatility of CBOT Ten-Year

Treasury futures (TY), and, by extension, of the volatility of Ten-Year Treasury Notes. Like the VIX, TYVIX is model independent. It applies the VIX methodology to the market prices of OZN options on TY futures1 . The times series of daily TYVIX values as well as the TYVIX term structure may be found at www.cboe.com/TYVIX.

The VIX formula which forms the basis of the TYVIX calculation is:

])1(}PrPr{2[30365*100 2

22 −−∆

+∆

= ∑∑ATM

KK j

jK

K i

ir

KFice

KK

iceKKeTYVIX

jj

i

i

τ

summarized as VARTYVIX30365*100= , the square root of annualized variance

expressed in percentage points.

This formula has its roots in theoretical results of Neuberger (1990) and Carr and Madan (2002) that show that the N-day variance of an asset (VAR) is approximated by the forward value of a portfolio of at- and out-of the-money N-day options on the asset.

1 The TYVIX formula is consistent with a random spot rate of interest. Jamshidian (1989) has shown that when the spot rate of interest is random, the prices of related bond futures and options can be interpreted as the discounted expected value of their final payoff, with the nuance that the expectation for each expiration is now taken under a different probability measure called the forward measure for that expiration. The forward measure is a transformation of the risk-neutral measure. Following Jamshidian, Mele and Obayashi (2012) have expressed the price of bond variance in terms of bond option prices. This is the basis of the TYVIX formula.

There are two other nuances that don’t affect the essential information conveyed by XTYN. First, the TYVIX formula strictly holds for European-style options and CBOT Treasury options have American-style exercise. The effect of ignoring the early exercise premium on volatility is likely to be small because the Treasury options used to calculate the index are out-of-the-money and short-dated. Second, TYVIX is interpolated from adjacent futures to arrive at a 30 day measure, and each futures expiration is associated with its own forward measure.

http://www.cboe.com/VXTYN

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In Equation (1):

The variable PriceKi denotes mid-quotes of out-of-the-money puts and calls with strikes Ki and Kj respectively,and the average of the mid-quotes of the at-the-money put and call.

22K

K∆, where ∆K is the strike interval associated with K, is the number of

options at strike K included in the portfolio.

erτ is the interest rate factor that converts the price of each option to a forward value.

The term 2)1( −=ATMKFε under the square root compensates for the error

introduced by the substitution of KATM, the strike deemed at-the-money, for the forward price. The substitution is necessary because there is usually no listed strike equal to the forward price.

The factor 30365

converts the 30-day variance into an annualized variance,

and TYVIX is defined as the square root of this annualized variance multiplied by 100 to express it in percentage points.

Looking at the TYVIX formula, an immediate question arises: what should one do if there are no OZN options expiring in 30 days? This question is answered in the following numerical example which describes how the TYVIX formula is implemented step by step.

Numerical Example of TYVIX Calculation

Step1: Find OZN Contract Months

At 3:15 p.m. CT on 11/10/2014, the closest to 30-day options listed were CME OZN options expiring at 4:00 p.m. on 11/21/2014 and on 12/26/2014. Note that the CME calls these December 2014 and January 2015 options. They settle to December 2014 TY and March 2015 TY futures respectively. A 30-day variance will be interpolated from at-and-out-of-the money OZN December 2014 and January 2015 options.

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Step 2. Exclusion of Illiquid OZN Strikes

Next, download bid and ask quotes of OZN Dec 2014 and Jan 2015 options from Bloomberg. On Bloomberg, the quotes are sorted in ascending strike order as shown in Table 1:

Table 1.3:15 p.m. 11/10/2014, Dec 2014 and Jan 2015 OZN options

Sources: Bloomberg, CBOE Options that are zero-bid are deemed illiquid and are excluded from the calculation. Strikes with bids of .001 correspond to cabinet trades and are also excluded. Excluded strikes are grayed out in Table 1, leaving a range of 124.5 to 129 for December 2014 OZN options and 120.5 to 133.5 for January 2015 OZN options.

Note that as volatility rises and falls, the strike price range of options with positive bids tends to expand and contract. As a result, the number of options

Dec 2014 OZN Options Jan 2015 OZN OptionsStrike Price call bid call ask put bid put ask strike call bid call ask put bid put ask

120.5 5.6875 5.875 0 0.015625 120.5 n.a. n.a. 0.015625 0.03125121 5.203125 5.390625 0 0.015625 121 n.a. n.a. 0.015625 0.03125

121.5 4.703125 4.890625 0 0.015625 121.5 4.03125 4.15625 0.03125 0.046875122 4.203125 4.390625 0 0.015625 122 3.5625 3.671875 0.046875 0.0625

122.5 3.734375 3.8125 0 0.015625 122.5 3.078125 3.203125 0.078125 0.09375123 3.234375 3.3125 0 0.015625 123 2.625 2.734375 0.109375 0.140625

123.5 2.734375 2.828125 0 0.015625 123.5 2.1875 2.296875 0.171875 0.203125124 2.234375 2.328125 0.001 0.015625 124 1.78125 1.890625 0.28125 0.296875

124.5 1.75 1.84375 0.015625 0.03125 124.5 1.421875 1.53125 0.40625 0.4375125 1.296875 1.359375 0.03125 0.0625 125 1.140625 1.1875 0.59375 0.609375

125.5 0.84375 0.9375 0.109375 0.125 125.5 0.859375 0.90625 0.8125 0.84375126 0.515625 0.578125 0.25 0.28125 126 0.640625 0.6875 1.09375 1.125

126.5 0.28125 0.3125 0.515625 0.546875 126.5 0.484375 0.5 1.421875 1.453125127 0.140625 0.171875 0.859375 0.890625 127 0.34375 0.375 1.78125 1.84375

127.5 0.0625 0.09375 1.265625 1.34375 127.5 0.25 0.28125 2.171875 2.25128 0.03125 0.0625 1.734375 1.8125 128 0.1875 0.203125 2.59375 2.6875

128.5 0.015625 0.03125 2.21875 2.28125 128.5 0.140625 0.15625 3.046875 3.140625129 0.015625 0.03125 2.703125 2.78125 129 0.09375 0.125 3.5 3.59375

129.5 0.001 0.015625 3.203125 3.265625 129.5 0.078125 0.09375 3.984375 4.078125130 0.001 0.015625 3.703125 3.765625 130 0.0625 0.078125 4.390625 4.578125

130.5 0 0.015625 4.125 4.3125 130.5 0.046875 0.0625 n.a. n.a. 131 0 0.015625 4.625 4.8125 131 0.03125 0.046875 n.a. n.a.

131.5 0 0.015625 5.125 5.3125 131.5 0.03125 0.046875 n.a. n.a. 132 0 0.015625 5.625 5.8125 132 0.015625 0.03125 n.a. n.a.

132.5 0.015625 0.03125 n.a. n.a. 133 0.015625 0.03125 n.a. n.a.

133.5 0.015625 0.03125 n.a. n.a.

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used in the TYVIX calculation may vary from month-to-month, day-to-day and possibly, even minute-to-minute.

Step 3. Determination of at- and out-of-the-money strikes.

Table 2 shows mid-quotes for all December 2014 and January 2015 OZN options that were not screened out in Table 1.

Table 2. Midquotes of OZN options

Dec 2014 OZN Jan 2015 OZN

Sources: Bloomberg, CBOE

The theoretical at-the-money strike is the forward price, and the difference between call and put prices at this strike is equal to zero. In Table 2, we see there is no strike at which this difference is zero. The forward price must therefore be estimated by applying put call parity:

F = Strike Price + ertau * (Call Price - Put Price)

Strike Price Call Put Difference Strike Call Put Difference124.5 1.79688 0.023438 1.7734375 120.5 n.a. 0.023438

125 1.32813 0.046875 1.28125 121 n.a. 0.023438125.5 0.89063 0.117188 0.7734375 121.5 4.09375 0.039063 4.0546875

126 0.54688 0.265625 0.28125 122 3.617188 0.054688 3.5625126.5 0.29688 0.53125 -0.234375 122.5 3.140625 0.085938 3.0546875

127 0.15625 0.875 -0.71875 123 2.679688 0.125 2.5546875127.5 0.07813 1.304688 -1.2265625 123.5 2.242188 0.1875 2.0546875

128 0.04688 1.773438 -1.7265625 124 1.835938 0.289063 1.546875128.5 0.02344 2.25 -2.2265625 124.5 1.476563 0.421875 1.0546875

129 0.02344 2.742188 -2.71875 125 1.164063 0.601563 0.5625125.5 0.882813 0.828125 0.0546875

126 0.664063 1.109375 -0.4453125126.5 0.492188 1.4375 -0.9453125

127 0.359375 1.8125 -1.453125127.5 0.265625 2.210938 -1.9453125

128 0.195313 2.640625 -2.4453125128.5 0.148438 3.09375 -2.9453125

129 0.109375 3.546875 -3.4375129.5 0.085938 4.03125 -3.9453125

130 0.070313 4.484375 -4.4140625130.5 0.054688 n.a.

131 0.039063 n.a. 131.5 0.039063 n.a.

132 0.023438 n.a. 132.5 0.023438 n.a.

133 0.023438 n.a. 133.5 0.023438 n.a.

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Put call parity holds at any strike but a more robust estimate of the forward price results if one uses the strike where the absolute difference between the call and put price is smallest. The Dec 2014 strike with the closest put and call is 126.5 (difference =-.2344), highlighted in yellow, and for Jan 2015 options it is 125.5 (.05469), highlighted in orange.

To apply put-call parity, find r, the rate of interest to the expiration of the option, and tau, the time to expiration in year units. The rate of interest r is found by cubic spline interpolation of Treasury bill rates published at http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield On 11/10/2014, the rates applied to Dec 2014 and Nov 2015 OZN options were 0.000444 and 0.000350 respectively. The number of minutes in a year is 525,600. Hence tau, or time to expiration in year units was:

December 2014 OZN: 0.03022603 = 15,885 / 525,600

January 2015 OZN: 0.12611301 = 66,285 / 525,600

Substitute these values in the put-call parity formula to obtain:

F1 = 126.5 + exp(0.000444 x 0.03022603) *(-.234375) = 126.2656219

F2 = 125.5 + exp(0.000350 x 0.126113014) x (.0546875) = 125.546899

The resulting OZN option strikes to use in the calculation are

OTM Puts ATM Call & Put OTM Calls Dec 2014 OZN 124.5-125.5 126 126.5-129 Jan 2015 OZN 120.5 - 125 125.5 126-133.5

All puts with strikes smaller than the at-the-money strike are included in the calculation, as well as all calls with strikes greater than the at-the-money strike. Both at-the-money put and call are included.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

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Step 4. Calculation of Variances from OZN Options

For each OZN expiration, Table 3 stacks the puts over the calls centered around the ATM strikes which are highlighted in green. Table 3. Variances from OZN Dec 2014 and Jan 2015 Options

Dec 2014 OZN OptionsStrike Price Number Options Option Price Forward value Portfolio

N=2* Delta K/ K^2 P = Mid-Quote ertau *N * P Weight124.5 6.45151E-05 0.0234375 1.51209E-06 1.98%

125 0.000064 0.046875 3.00004E-06 3.93%125.5 6.34911E-05 0.1171875 7.44046E-06 9.75%

126 6.29882E-05 0.40625 2.55893E-05 33.55%126.5 6.24912E-05 0.296875 1.85523E-05 24.32%

127 6.20001E-05 0.15625 9.68765E-06 12.70%127.5 6.15148E-05 0.078125 4.80591E-06 6.30%

128 6.10352E-05 0.046875 2.86106E-06 3.75%128.5 6.05611E-05 0.0234375 1.41942E-06 1.86%

129 6.00925E-05 0.0234375 1.40844E-06 1.85%Sum 7.62767E-05 100.00%Epsilon 4.44413E-06Variance 7.18326E-05

Jan 2015 OZN OptionsStrike PriceNumber Options Option Price Forward value o Portfolio

N=2* Delta K/ K^2 Mid-Quote ertau *N * P Weight120.5 3.44347E-05 0.0234375 8.07098E-07 0.48%

121 3.41507E-05 0.0234375 8.00442E-07 0.48%121.5 3.38702E-05 0.0390625 1.32311E-06 0.79%

122 3.35931E-05 0.0546875 1.8372E-06 1.09%122.5 3.33195E-05 0.0859375 2.86352E-06 1.71%

123 3.30491E-05 0.125 4.13132E-06 2.46%123.5 3.2782E-05 0.1875 6.14691E-06 3.66%

124 3.25182E-05 0.2890625 9.40021E-06 5.60%124.5 3.22575E-05 0.421875 1.36093E-05 8.11%

125 0.000032 0.6015625 1.92508E-05 11.47%125.5 3.17455E-05 0.85546875 2.71585E-05 16.18%

126 3.14941E-05 0.6640625 2.0915E-05 12.46%126.5 3.12456E-05 0.4921875 1.53794E-05 9.16%

127 3.10001E-05 0.359375 1.11411E-05 6.64%127.5 3.07574E-05 0.265625 8.1703E-06 4.87%

128 3.05176E-05 0.1953125 5.96073E-06 3.55%128.5 3.02805E-05 0.1484375 4.49497E-06 2.68%

129 3.00463E-05 0.109375 3.28646E-06 1.96%129.5 2.98147E-05 0.0859375 2.56231E-06 1.53%

130 2.95858E-05 0.0703125 2.08034E-06 1.24%130.5 2.93595E-05 0.0546875 1.60567E-06 0.96%

131 2.91358E-05 0.0390625 1.13817E-06 0.68%131.5 2.89147E-05 0.0390625 1.12953E-06 0.67%

132 2.86961E-05 0.0234375 6.72593E-07 0.40%132.5 2.84799E-05 0.0234375 6.67527E-07 0.40%

133 2.82662E-05 0.0234375 6.62517E-07 0.39%133.5 2.80548E-05 0.0234375 6.57564E-07 0.39%

Sum 0.000167853 100.00%Epsilon 1.89901E-07Variance 0.000167663

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From left to right, Table 3 columns contain:

1. The strike of the put and call

2. 22K

K∆, the number of options included at each strike, where the strike

interval ∆K is set as half the distance between adjacent strikes, or the distance from the next strike for end strikes. The strike interval is usually equal to .5 at all OZN strikes. The number of options at the 124.5 strike is 2* .5/124.52 = 6.4515E-05 OZN Dec 14 OZN puts

3.The mid-quotes at each strike. The mid-quote at the ATM strike is the average of the put and call mid-quotes. Thus, for Dec 2014 OZN options:

.40625 = average (.54688, . 265625)

4.The forward value of the option at each strike. For example, the forward value of the price of the 124.5 OZN Dec 2014 call is

1.51209E-06 = exp(0.000444 x 0.03022603)* 6.4515E-05*.0234375.

5.The portfolio weight of the forward value of the option at each strike.

For each OZN expiration,the sum of the forward values across strikes is in the bottom row labeled sum. The variance is found by substracting the adjustment factor “epsilon” = (F/K ATM - 1)2 from this sum:

Epsilon1= (126.2656219/126 -1)2 = 4.44413E-06

Epsilon2 = (125.546899 /125.5 – 1)2 =1.89901E-07 Variance from December 2014 OZN Options VAR1 = 7.62767E-5 - 4.44413E-06 = 7.18326E-05 Variance from January 2015 OZN Options

VAR2 = .000167853 – 1.89901E-07=.000167663

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Step 5: Interpolation of a 30-Day Variance and Determination of TYVIX

The last step to TYVIX is to interpolate a 30-day variance from December 2014 and January 2015 OZN variances, annualize the variance, take the square root and multiply by 100 to express it in percentage points:

))1((30365*100 21 VARwwVARTYVIX −+=

VAR1 is the variance of December 2014 futures from 11/10/2014 to 11/21/2014 and VAR2 is the variance of January 2105 TY futures from 11/10/2014 to 12/26/2014. The weights are w and 1-w.

For the purpose of the calculation, time is recorded in minutes. Thirty days = 30*24 *60 mn = 43,200 mn variance. The December 2014 OZN options have 15,885 mn to expiration (525+ 14,400 + 960 = 15,885) and the January 2014 OZN options have 66,285 mn to expiration (525+ 960 + 64,800=66,285). Hence,

5420.1

4580.885,15285,66200,43285,66

=−

=−−

=

w

w

Substitute the weights and variances in the formula :

).000167663*.5420057.18326E*(.458030365*100T +−=YVIX

5.11T =YVIX

Conversion of TYVIX to TYVOL, a Yield Volatility In the fixed income market, there are two conventions for calculating and quoting volatility. The first expresses volatility as the variation of a rate of interest or yield and quotes it in basis points. The second expresses volatility as the variation of

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the rate of return of the asset and quotes it in percentage points. VIX belongs to this second category, as does TYVIX. To facilitate the comparison between TYVIX and yield volatilities, CBOE converts the TYVIX Index to a yield volatility index called Ten-Year Treasury Yield Volatility Index (TYVOLSM). Figure 2 shows TYVOL, TYVIX and the Merrill Option Volatility Expectations Index (MOVE® index). The MOVE index is a measure of the average yield volatility of 2, 5, 10, and 20 year Treasury bonds. The derivation of TYVOL is described in a separate note titled “Conversion of the TYVIX IndexSM to the Ten-Year Treasury Yield Volatility Index (TYVOLSM Index)”. Figure 2 TYVOL, MOVE, and TYVIX

Source: CBOE, Bloomberg IV. Salient Features of TYVIX

1. Descriptive Statistics, TYVIX and VIX

Treasuries are reputed to be less volatile than stocks. To confirm, the frequency distributions and standard statistics for TYVIX and VIX are reported in Figure 4. In the histogram on the left, the distribution of TYVIX is located to the left of the distribution of VIX. It is also more compact, less skewed and less kurtotic than VIX. Standard descriptive statistics in the top right panel of the table tell the same story in numbers.

0 50

100 150 200 250 300

12/19/ 2006 5/19/2 007 10/19/ 2007 3/19/2 008 8/19/2 008 1/19/2 009 6/19/2 009

11/19/ 2009 4/19/2 010 9/19/2 010 2/19/2 011 7/19/2 011 12/19/ 2011 5/19/2 012

10/19/ 2012 3/19/2 013 8/19/2 013 1/19/2 014 6/19/2 014 11/19/ 2014

TYVOL MOVE

3.5 5.5 7.5 9.5 11.5 13.5 15.5

0 50

100 150 200 250 300

12/19/ 2006 5/19/2 007 10/19/ 2007 3/19/2 008 8/19/2 008 1/19/2 009 6/19/2 009

11/19/ 2009 4/19/2 010 9/19/2 010 2/19/2 011 7/19/2 011 12/19/ 2011 5/19/2 012

10/19/ 2012 3/19/2 013 8/19/2 013 1/19/2 014 6/19/2 014 11/19/ 2014

TYVOL TYVIX

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Figure 4. Historical Range & Behavior of TYVIX and VIX Values

Source: CBOE

Futures traders are especially interested in the volatility of the underlying asset. The bottom of the right panel of Figure 4 shows statistics for the absolute daily log-return of the index. By this measure, the volatility of TYVIX is comparable to that of VIX.

Figure 5. TYVIX and VIX

Source: CBOE

Continuing with our comparison, TYVIX estimates the volatility of 10-year Treasury Notes, while VIX estimates the volatility of the S&P 500® Index. Since these two asset classes are impacted by different factors, one would not expect their volatilities to behave in the same way. And as shown in Figure 5, they do not. There are marked differences even during the financial crisis of 2008. TYVIX and VIX both peak during the third quarter, but TYVIX starts its ascent

0 10 20 30 40 50 60 70 80 90

0 2 4 6 8

10 12 14 16 18 20

1/2/20 03 1/2/20 04 1/2/20 05 1/2/20 06 1/2/20 07 1/2/20 08 1/2/20 09 1/2/20 10 1/2/20 11 1/2/20 12 1/2/20 13 1/2/20 14

VIX TYVIX

TYVIX VIX

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earlier and retreats more gradually. Out of global crisis mode, the paths of TYVIX and VIX diverge even more.

2. Empirical Properties of TYVIX Time Series

a. Mean Reversion of TYVIX

A hallmark of volatility is that it is range-bound. The upper and lower bounds of the range act as reflecting barriers which lend the index the appearance of reverting to a mean. To explore the mean-reverting tendencies of TYVIX, we follow the six-month path of TYVIX conditional on its initial value. Each panel of Figure 6 shows future ranges of TYVIX from one week to six months out, starting from a different range of initial values. For example, in the first panel, initial values range from 4 to 7. The blue lines represent the initial and future ranges of TYVIX, from one week to 6 months later. The black rectangles mark the average and median values of TYVIX from one week to six months later.

Figure 6. Six-Month Conditional Volatility Cones of TYVIX, 2003- 2014

Source: CBOE

Based on these historical six-month patterns, the average and median values of TYVIX persist for as long as six months when the current value of TYVIX is at or below its long-term average of 7, and they gradually decrease when TYVIX is above its long-term average. On average, and this is also borne out by the evolution of the range of TYVIX; mean-reversion appears stronger when TYVIX is at a historically high level and less so when TYVIX is at a historically low level.

b. TYVIX Volatility Premium

A key attraction of volatility as an asset is its explosive behavior during tail events that impact the rate of return of the underlying asset. Investors pay a risk

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Spo

t1w 2w 1m 2m 3m 4m 5m 6m

Initial Range 4-7

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Spo

t1w 2w 1m 2m 3m 4m 5m 6m

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t1w 2w 1m 2m 3m 4m 5m 6m

Initial Range 11 to 14

0

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Spo

t1w 2w 1m 2m 3m 4m 5m 6m

Initial Range 14 to 17

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premium for the natural hedge that volatility provides against adverse returns. The risk premium is embedded in the spread between expected and realized volatility, but is sometimes overshadowed by large forecasting errors. If forecasting errors are unbiased, the average spread should be positive. In Figure 7, we see that TYVIX indeed tends to be greater than the realized volatility of futures on 10-year Treasury notes. Exceptions occur more frequently in the period surrounding the 2008 credit crisis when the market significantly underestimated future volatility.

Figure 7. TYVIX Implied vs. Realized Risk Premium

Source: CBOE

c. What Moves TYVIX?

TYVIX is highly sensitive to announced changes in monetary policy and to macroeconomic events that affect interest rates. The broad impact of monetary policy is captured in Figure 8, where TYVIX is overlaid on the Federal Fund Target rate. TYVIX steadily decreases during the slow ramp up of the Federal Fund Target rate from 2004 to 2006, but it increases more rapidly when the Federal Fund Target rate starts to cascade down in late 2007. Once the rate hits bottom, TYVIX reacts to different events and news such as talk about tapering that may lift the rate.

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-5

0

5

10

15

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1/19/0 7 6/19/0 7 11/19/ 07 4/19/0 8 9/19/0 8 2/19/0 9 7/19/0 9

12/19/ 09 5/19/1 0 10/19/ 10 3/19/1 1 8/19/1 1 1/19/1 2 6/19/1 2

11/19/ 12 4/19/1 3 9/19/1 3 2/19/1 4

Realized TYVIX Risk Premium TYVIX

15


Figure 8. TYVIX Time Series vs. Federal Fund Target Rate

Source: CBOE, Bloomberg Figure 9 illustrates that the joint impact of the Federal Reserve’s QE programs, uncertainty about future Federal Reserve policy, and “macro-crises”, such as Standard & Poor’s downgrade of U.S. debt in August 2011, have made longer term yields jumpier than in the period preceding the 2008 credit crisis. TYVIX has followed suit and has become more sensitive to rate fluctuations. Figure 9. TYVIX and Changes in Select Rates of Interest

Source: CBOE and Bloomberg

Z IRP

Flash Crash

Operation Twist

Taper Talk

0 2 4 6 8

10 12 14 16

2-Jan-03 2-Jan-04 2-Jan-05 2-Jan-06 2-Jan-07 2-Jan-08 2-Jan-09 2-Jan-10 2-Jan-11 2-Jan-12 2-Jan-13 2-Jan-14

TYVIX Federal Funds Target Rate

1 2 3 4 5 6 7

3 5 7 9

11 13 15

1/8/20 04 1/8/20 05 1/8/20 06 1/8/20 07 1/8/20 08 1/8/20 09 1/8/20 10 1/8/20 11 1/8/20 12 1/8/20 13 1/8/20 14

Fixed Income Rates TYVIX

TYVIX 30-YR Conventional Mortgage Rate 10Y Swap Rate AAA Corp Yield

16


Futures trading is not suitable for all investors, and involves risk of loss. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation at www.theocc.com. The information in this document is provided solely for general education and information purposes, and is not intended to provide, and should not be relied on for financial or legal advice. No statement within this document should be construed as a recommendation to buy or sell a future or security or to provide investment advice. It is not possible to invest directly in an index. Past performance does not guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this document is available from CBOE upon request. Visit www.cboe.com/TYVIX for more information. The CBOE/CBOT 10-Year U.S. Treasury Note Volatility Index (TYVIXSM Index), CBOE Ten-Year Treasury Yield Volatility Index (TYVOLSM index) and CBOE Volatility Index® (VIX® index) and all other information provided by Chicago Board Options Exchange, Incorporated (CBOE) and its affiliates and their respective directors, officers, employees, agents, representatives and third party providers of information (the “Parties”) in connection with the TYVIX, TYVOL and VIX® Indexes (collectively “Data”) are presented "as is" and without representations or warranties of any kind. The Parties shall not be liable for loss or damage, direct, indirect or consequential, arising from any use of the Data or action taken in reliance upon the Data. This document contains comparisons regarding the performance of indexes based on backtesting, i.e., calculations of how the indexes might have performed in the past if they had existed. Backtested performance information is purely hypothetical and is provided in this document solely for informational purposes. Backtested performance does not represent actual performance, and should not be interpreted as an indication of actual performance. The VIX® index methodology is the property of CBOE. CBOE®, CBOE Volatility Index®, Execute Success® and VIX® are registered trademarks and CBOE Ten-Year Treasury Yield Volatility Index, TYVOL and TYVIX are service marks of CBOE. CBOT is a trademark of CME Group, Inc. (CME). CBOE has, with the permission of CME, used such trademark in the CBOE/CBOT 10 Year U.S. T-Note Volatility Index. CME makes no representation regarding the advisability of investing in any investment product that is based on such index. Standard & Poor's®, S&P® and S&P 500® are registered trademarks of Standard & Poor's Financial Services, LLC and have been licensed for use by CBOE. Financial products based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in such products. MOVE® is a registered trademark of Bank of America Corporation..Redistribution, reproduction and/or photocopying in whole or in part are prohibited without the written permission of CBOE.

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Guide to the CBOE / CBOT 10 Year Treasury Note Volatility · 2016-09-08 · OZN options expiring at 4:00 p.m. on 11/21/2014 and on 12/26/2014. Note that the CME calls these December