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Introduction

Fixed Income ETFs (“FI ETFs”) are a relatively recent, but

important innovation in the bond markets. FI ETFs are fully

funded, exchange traded bond portfolios, most of which

seek to track established fixed income market capitalization-

weighted benchmarks. For many investors, FI ETFs provide

a liquid, transparent and cost-effective way of to access the

cash bond markets. FI ETFs allow investors to trade

portfolios of hundreds or thousands of bond positions in a

two way market on exchange through the ETF wrap. Their

unique physical creation/redemption mechanism allows

dislocations between exchange values and OTC values to

be arbitraged, providing investors with fixed income price

discovery across two distinct trading venues, the exchange

and OTC market1.

Listed and OTC options now trade on many fixed income

ETFs. As some of these options have become more liquid,

investor interest has increased both outright and relative to

other fixed income options. This paper will explore the

mechanics and trading of options on FI ETFs, how to

compare them to other fixed income options and how they

may be used in portfolio strategies or in a relative value

context.

Important differences between FI ETF options

and other fixed income options

There are a number of conceptual differences between FI

ETFs and traditional fixed income securities as well as FI

ETF options and other fixed income options. A simple fixed

income option, such as a swaption, gives the holder the right

to exercise into a long or short position in an underlying

swap or bond at a known fixed rate / price and a known

maturity on the expiration date (in the case of a European

exercise feature or prior to that date in the case of an

American or “Bermudan” exercise feature).

FI ETF options differ in important ways from traditional FI

options.

Ongoing Portfolio vs. Individual Bond

An FI ETF option essentially represents an option on an entire portfolio of bonds as opposed to a single bond or swap.

Understanding Fixed Income ETF

Options

January 2018

The portfolio is rebalanced monthly in alignment with the

underlying reference benchmark that it seeks to track and

therefore lacks a “maturity”2. Accordingly, the underlying

characteristics such as the average coupon and average

maturity of the portfolio may change over time as the index

evolves.

Rules governing index inclusion/exclusion of securities are

available, but it is not possible as an example to predict what

new issues may come to market and ultimately be included

in an index or what issues may get downgraded below a

specified index ratings threshold or be subject to a corporate

action which would result in removal from an index. Passive

FI ETFs typically sample the index, seeking to minimize

tracking error without increasing rebalancing costs.

In reality, the reference benchmarks and the more

seasoned, liquid fixed income ETFs hold hundreds if not

thousands of securities. Accordingly, month over month

changes in index and portfolio composition are unlikely to be

dramatic, so there is a reasonable degree of stability in risk

characteristics and cash flows. Note that these parameters

have been reasonably stable over time. As an example,

Figure 1 shows a time series of durations for HYG (iShares iBoxx $ High Yid Corp Bond ETF).

Figure 1: HYG Durations

Cash Distributions

Unlike a conventional vanilla fixed income option on a single

bond/swap in which the underlying’s cash flows are known

and deterministic, the distributions made by fixed income

ETFs can vary.

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

4.80

5.00

5/1

/201

4

7/1

/201

4

9/1

/201

4

11/1

/20

14

1/1

/201

5

3/1

/201

5

5/1

/201

5

7/1

/201

5

9/1

/201

5

11/1

/20

15

1/1

/201

6

3/1

/201

6

5/1

/201

6

7/1

/201

6

9/1

/201

6

11/1

/20

16

1/1

/201

7

3/1

/201

7

5/1

/201

7

Option A

dju

ste

d D

ura

tion

Source: Blackrock, 5/31/2017

1 Tucker, M. and S. Laipply. “Bond Market Price Discovery: Clarity Through the Lens of an Exchange”. The Journal of Portfolio Management, Winter 2013, pp 49-62

2 The exception would be “term maturity” ETFs and the indices they track such as iBonds®. For these vehicles both the ETF and the underlying index eventually transition to cash and mature

FOR WHOLESALE CLIENTS ONLY – NOT FOR RETAIL OR PUBLIC DISTRIBUTION 1EII0318A-450667-1424721

Interest on the fund’s underlying bond portfolio accrues daily

and the amount of income earned by the fund is distributed

monthly to all shareholders of record. Similar to a full bond

price falling by the amount of the coupon on a coupon date,

the ETF’s NAV should fall by the amount of the distribution

on the ex-dividend date. As a result, unexpected changes in

the size of the distribution should not have an impact on an

investor’s total return. However, unexpected changes in the

size of the distribution can change the “moneyness” of a

particular option. In practice, fund distributions have tended

to be fairly stable over time and have typically trended with

the overall yield environment as the index and fund

rebalances. Figure 2 uses LQD (iShares iBoxx $ High Yield Corporate Bond ETF) as an example.

Figure 2: LQD yield vs. Benchmark yield, 5/2014

-5/2017

Carry and Forward Price Arguments for FI ETFs

The variation in distributions, relative to the fixed coupon of

an individual bond, adds uncertainty to the calculation of

forward ETF prices. Additionally, there can also be variation

in the overnight borrow rate of the underlying FI ETF as term

borrow rates are atypical. Accordingly, FI ETF forward price

modeling relies on assumptions with respect to future

distributions as well as financing rates.

ETF forward prices will therefore be a function of:

► Current price

► Projected distributions

► Projected borrow rate

► Cash money market rate

Example 1: US Treasury forward pricing

As an example, it is a fairly straightforward exercise to

calculate the forward price for a 5-year US Treasury.

Consider the 2 3/8s of 05/15/27. On 5/15/17, the price for

this security was $100.28 which translated to a yield to

maturity of 2.34%. Assuming a term repo rate of 80 bps, the

forward price for this security for a settlement date of

6/15/17, was approximately:

Where,

PX(ft) = forward price as of time t

PX(s0) = spot price

repo = term repo rate

c = coupon

Example 2: TLT Forward Pricing

Now consider TLT, the iShares 20+ Year Treasury Bond

ETF which closed at a price of $121.06 on 5/15/17. Unlike

US Treasury bonds, there is not an active repurchase

market for FI ETF shares. However, clients may borrow and

lend ETF shares through the securities lending market.

Unlike the repo market, investors may be constrained with

respect to the use of cash arising from securities lending

transactions (i.e., proceeds are held by the securities lender

and generally invested in money market assets). In a US

Treasury repo transaction, an investor borrows / lends funds

in the repo market and then purchases / shorts the US

Treasury which then serves as collateral against the

repurchase agreement (haircuts would apply).

Source: Blackrock, Markit iBoxx 5/31/2017. Past performance

does not guarantee future results. For standardized

performance, see the end of this document.

As an example, assume that, immediately prior to the ex-

dividend date, an ETF has one shareholder and $1 of

earned income. Now assume that a new investor enters the

fund (also immediately prior to the ex-dividend date) by

contributing securities equal to the fund NAV in exchange for

a newly issued share. Both investors, being equal

shareholders, are entitled to an equal share of the fund’s

distribution. Accordingly, while the fund will still distribute $1

of total income, each investor will only get $0.50. Prior to the

second investor entering the fund, the original investor would

have received $1 in distributions and would have seen the

NAV of the fund drop by $1 on the ex-dividend date (all else

equal). With the inclusion of the new investor, both investors

will receive $0.50 in distributions (i.e., $1 in distributable

income divided by two shareholders) and will see the NAV

per share drop by $0.50 instead of $1.

Note that the total return under both scenarios will be

identical. However, since option strikes are not adjusted for

distributions, the size of the distribution may push an option

further into or out of the money. In this case, the NAV

decline was only half of what it would have been prior to the

entry of the second shareholder which means that any

option (put or call) outstanding would see less of a change in

value on the ex dividend date. Going forward, the “dilution”

effect would be reconciled since twice as many assets would

be earning twice as much income. All else equal, on the next

dividend date, there would be $2 of distributable income, or

$1 / share which was the state that existed prior to the entry

of the second shareholder.

𝐏𝐗 𝒇𝒕

= 𝐏𝐗 𝒔𝟎 × (𝟏 + 𝐫𝐞𝐩𝐨 𝒙𝐝𝐚𝐲𝐬 𝒂𝒄𝒕𝒖𝒂𝒍

𝟑𝟔𝟎− 𝟏𝟎𝟎 𝒙 𝒄 𝒙

𝐝𝐚𝐲𝐬 𝒂𝒄𝒕𝒖𝒂𝒍

𝟑𝟔𝟓)

𝐏𝐗 𝐟𝐭 = $𝟏𝟎𝟎. 𝟐𝟖 × 𝟏 + 𝟎. 𝟖𝟎% ×𝟑𝟎

𝟑𝟔𝟎− 𝟏𝟎𝟎 𝐱 𝟐. 𝟑𝟕𝟓% 𝐱

𝟑𝟎

𝟑𝟔𝟓=

$𝟏𝟎𝟎. 𝟏𝟓

2.5%

3.0%

3.5%

4.0%

4.5%

9/28/12 9/28/13 9/28/14 9/28/15 9/28/16

Benchmark Yield 30-day SEC Yield


In a TLT securities lending transaction, an investor could

purchase/short TLT while lending / borrowing the underlying

shares (haircuts would apply in this case as well). The TLT

purchase must be fully funded by the investor and a

significant amount of proceeds from a TLT short may be

required as collateral by the securities lender against the

borrow of shares. Accordingly, the forward pricing arguments

for an FI ETF differ slightly relative to a bond in the repo

market as the opportunity cost of cash comes into play

(Figure 3):

Figure 3: Example of ETF lend/borrow transaction

Where,

ETF(ft) = forward price as of time t

ETF(s0) = spot price

rm = money market rate

rebate = the cost of borrowing shares / rate paid on

lending shares

y = ETF distribution yield

In order to calculate a forward price, assumptions about the

distribution and lend or borrow rate over the forward period

must be employed. TLT’s June 2017 distribution was

$0.293841 and it is assumed that the same distribution will

apply for July which translates into an annualized distribution

yield of $0.25481/$121.06 x 12 = 2.53%.

Assume that the overnight lending rate is 30 bps and the

overnight borrow rate is 50 bps (as provided by the lending

agent). For illustrative purposes, the average of the overnight

lend/borrow rebate, 40 bps, will be assumed for the entire

period. Finally, the money market rate is assumed to be

1.18%. The midmarket forward price from 05/15/17 to

06/15/17 would therefore be:

Unlike the UST forward calculation described in Example 1,

both the “fixed rate” of the ETF (i.e., the distributions) as well

as the financing rate are subject to change over the option

period given that term lending markets are difficult to attain.

The implication is that it is not theoretically possible to “lock

in” the forward price through a traditional cash and carry

strategy, and as a result, the option delta can be more

volatile.

As an example, assume that an options market maker

wished to trade and hedge the 121 strike TLT puts of

6/16/17 which closed at $1.47 / $1.50, or $1.485 midmarket

on 5/15/17. Using the same assumptions outlined previously

and the Bloomberg calculator OVME, the forward price

would have been $120.88 and the delta would have been -

50.7%. Assume, however, that the true distribution yield

ultimately turned out to be 3.53% instead of the previously

assumed 2.53%. Knowledge of the actual distribution rate

would have resulted in a “true” forward price calculation of:

The delta of the option based on this forward price would

have been -51.7% as opposed to the previously thought -

50.7% and the option value (all else equal) would have been

$1.54 instead of $1.49. As a result, a writer of this option

would have been under-hedged and would also have sold

the option for a lower price than what was justified by the

true forward price.

Indeed the estimated hedging losses (derived from the

difference in put values) that arose from the difference

between the realized vs. estimated distributions would have

been roughly $0.05 per option, or about 4 bps. While this

may not seem like a significant amount, a writer of $25MM

notional of this option would stand to lose approximately

$10,325. This in part may explain why options on FI ETFs

may tend to trade at wider bid/offer spreads than similar US

Treasury futures options or swaptions.

Overview of fixed income ETF options

Listed options exist on a number of fixed income ETFs.

American-style exercise puts and calls are available and

follow a calendar expiration schedule. Options on fixed

income ETFs are very similar to options on single stocks in

that they may be settled through delivery of the underlying in

exchange for the strike price. Figure 4 shows a Bloomberg

screenshot (function OMON) for listed options on HYG:

Figure 4: Listed Options on HYG

Lending

agent

ETF long

holder

ETF

borrower

/ short

seller

Fund shares Fund shares

Cash & MTM

Collateral

Fund

distributions &

borrow rebate

Fund

distributions &

lending rebate

Cash

collateral

Cash investment vehicle

𝐄𝐓𝐅 𝐟𝐭 = 𝐄𝐓𝐅 𝐬𝟎 × (𝟏 + (𝐫𝐦 − 𝐫𝐞𝐛𝐚𝐭𝐞) ×𝐝𝐚𝐲𝐬 𝐚𝐜𝐭𝐮𝐚𝐥

𝟑𝟔𝟎− 𝐲 ×

𝐝𝐚𝐲𝐬 𝐚𝐜𝐭𝐮𝐚𝐥

𝟑𝟔𝟓)

$𝟏𝟐𝟏. 𝟎𝟔 × (𝟏 + (𝟏. 𝟏𝟖% − 𝟎. 𝟒𝟎%) ×𝟑𝟏

𝟑𝟔𝟎− 𝟐. 𝟓𝟑% ×

𝟑𝟏

𝟑𝟔𝟓= $𝟏𝟐𝟎. 𝟖𝟖

$𝟏𝟐𝟏. 𝟎𝟔 × (𝟏 + (𝟏. 𝟏𝟖% − 𝟎. 𝟒𝟎%) ×𝟑𝟏

𝟑𝟔𝟎− 𝟑. 𝟓𝟑% ×

𝟑𝟏

𝟑𝟔𝟓= $𝟏𝟐𝟎. 𝟕𝟖

Source: Bloomberg


As the screenshot illustrates, call and put options are quoted

at different strikes across different dates. To understand

quoting conventions and mechanics, we will examine a

specific option, the June 16, 2017 expiry 88 strike call

(Figure 5) as of 5/16/2017:

Figure 5: 88 Strike HYG Call (06/16/17 expiry)

The option is an American style call struck at $88 (i.e., the

long has the right to pay $88 in proceeds to the short in

exchange for a share of HYG on or before expiration). The

final expiration is 6/16/17, but the option may be exercised

earlier. Each option controls 100 shares of the underlying

fund, HYG. HYG options are currently quoted in $0.05

increments.

On 5/16/17, HYG closed at $88.31 and the open interest on

this option was 88,487 contracts. The current notional

outstanding was therefore 88,487 x 100 x $88.31 =

$781,428,697. The displayed delta was -0.653, so the delta

equivalent notional amount outstanding was approximately

0.653 x $781,428,697 = $510,272,939. The option was

quoted at a price of $0.50 bid / $0.57 ask (or 57 bps / 65 bps

relative to the $88.31 closing price). The displayed

midmarket price volatility for this option was approximately

4.50%. Because the options are American style exercise as

opposed to European, strict put/call parity does not apply but

the less restrictive conditions governing American style

options do (i.e., calls should generally not be exercised early

except potentially immediately prior to the ex-dividend date

while puts may be exercised if sufficiently deep in the

money).

Recall that the general boundary condition for American

style puts and calls is:

Where,

S = current share price

D = forecasted dividend(s) prior to expiry

X = strike price

r = discount rate

t = time to expiry (years)

C = call price (ask)

P = put price (bid)

We will refer to the 88 strike HYG calls and puts expiring on

6/16/17. We note that the 88 strike put expiring on 6/16/17

was being quoted at $0.60 / $0.64. Using full bid / ask

prices, a 1% discount rate, estimated discounted

distributions totaling $0.37 through expiration and 30 days

until expiration, we get the following result:

Therefore, the 6/16/17 expiry 88 strike call and put were

trading within their theoretical boundary condition and no

actionable arbitrage existed.

Calculating Implied Volatility with Carry

Arguments

As we saw in prior sections, assumptions about distributions

and financing can impact the forward price of the ETF.

Accordingly, for a given option quote, varying assumptions

about carry and the ETF forward price can impact the

calculation of implied volatility.

As an example, the July 21, 2017 87 strike HYG puts were

being quoted at a midmarket level of $0.725 at the close of

5/16/17. Assuming a distribution yield of 5.10%, a money

market yield of 1.18% and a borrow cost of zero, the forward

price would be $87.69 vs. the closing spot of $88.31. The

implied volatility corresponding to the forward vs. the option

value was 6.98%3.

Assume, however, that the actual borrow rate was 0.80% vs.

a lending rate of 0.30%, or 0.55% midmarket. Incorporating

this midmarket rate would result in a forward price of $87.60

(or $0.09 lower) and a corresponding implied volatility of

6.75% (or 0.23% lower). Figure 6 below illustrates the

computation using the Bloomberg OVME screen:

Figure 6: Calculating Implied Volatility

Source: Bloomberg

𝐒 − 𝐃𝐞−𝐫𝐭 − 𝐗 ≤ 𝐂 − 𝐏 ≤ 𝐒 − 𝐗𝐞−𝐫𝐭

$𝟖𝟖. 𝟑𝟏 − $𝟎. 𝟑𝟕 − $𝟖𝟖 ≤ $𝟎. 𝟓𝟕 − $𝟎. 𝟔𝟎 ≤ $𝟖𝟖. 𝟑𝟏 − $𝟖𝟖𝒆(−𝟎.𝟎𝟏×𝟑𝟎𝟑𝟔𝟓)

−$𝟎. 𝟎𝟔 ≤ −$𝟎. 𝟎𝟑 ≤ $𝟎. 𝟑𝟖

Source: Bloomberg

3. Per Bloomberg OVME calculation


The Impact of Financing

It can be challenging to lock in term financing rates for an

ETF position. However, financing may be obtained indirectly

through the options market. Consider the June 16, 2017 95

strike HYG puts which were offered at $7.30 (or 827 bps

relative to a closing price of $88.31) on 5/16/17. Given

HYG’s closing price of $88.31, these puts are fairly deep in

the money and have little volatility sensitivity associated with

them. In that respect, they are akin to a short forward

position on HYG.

Using the same assumptions as before (a forecasted

distribution yield of 5.10%, cash money market rate of

1.18%), a borrow rate of 0% implied a volatility of

approximately 22% for the quoted option value of $7.30.

However, given how deeply in the money the option was, an

investor could assume that the true volatility level is zero.

Holding all else equal, a 0% volatility implied an annualized

borrow cost of 4.5%. (see Figure 7).

Figure 7: Implied borrow rate given quoted put

price

Figure 8 shows the implied annualized borrow costs over a

range of implied volatilities holding all other assumptions

constant for the above option. The option investor may then

assess the relative value of getting long or short the option

based on their assessments of financing rates and volatilities

vs. those implied by the market.

Figure 8: Implied volatility vs. implied borrow costs

Valuing Fixed Income ETF options

Because FI ETF options are American-style exercise, they

must be valued using lattice approaches employing term

structure models. A number of assumptions must be made

including projected distributions, financing rates and the

value of the fund on the final option expiry date. Because the

reference benchmark and fund are perpetual exposures,

assumptions must be made as to the value of the fund at

varying yield levels. The terminal values may be estimated

by running scenario analysis on estimated holdings for each

terminal yield scenario. Given the difficulty in precisely

estimating future index holdings, such an analysis may be

performed on current holdings. The appendix provides an

example of the valuation of a 7/21/17 expiry 123 strike put

on TLT.

Comparing volatility measures

Because fixed income ETFs trade on a price basis, options

on those ETFs are quoted on a price volatility basis. This is

in contrast to other fixed income options which may trade on

a yield volatility or spread volatility basis. In order to directly

compare FI ETF options with other fixed income options, we

will use “normalized” volatility as a common metric.

Normalized volatility is a scaled metric that is expressed in

basis points of volatility per annum. Note the following

definitions:

• Yield or spread volatility: The lognormal or “percentage”

volatility of the underlying yield or spread which

corresponds to the Black-Scholes-Merton (“BSM”) implied

volatility. This metric can be used for pricing interest rate

options in the BSM framework.

• Price volatility: The lognormal or “percentage” volatility

of the underlying price which corresponds to BSM implied

volatility. This metric can be used for pricing equity

options or other options such as fixed income ETFs that

trade on a price basis in the BSM framework.

• Normalized volatility: Scaled volatility which is defined

as follows for fixed income instruments:

• Normalized yield volatility (derived from yield) =

yield volatility x yield level

• Normalized yield volatility (derived from price) =

price volatility / forward duration

• Normalized spread volatility = Spread volatility x

spread level

Normalized volatility allows us to compare different types of

fixed income options on a comparable basis.

Source: Bloomberg

Implied Volatility Implied borrow

0.00% 4.50%

5.00% 4.15%

10.00% 4.10%

15.00% 3.40%

20.00% 1.10%

21.50% 0.00%

For illustrative purposes only.

𝐍𝐨𝐫𝐦𝐚𝐥 𝐕𝐨𝐥 =𝐏𝐫𝐢𝐜𝐞 𝐕𝐨𝐥

𝐃𝐮𝐫𝐚𝐭𝐢𝐨𝐧𝐟𝐰𝐝


Figure 9 shows implied normalized volatility curves for TLT,

UST bond futures options and options on 25yr USD swaps.

Note that the TLT and futures options trade on a price basis,

while swaptions trade on a yield basis. All were converted to

normalized annual volatility. In this case, options on TLT,

swaptions (on 25 year swaps), and bond futures options

appear to trade in context with each other with some

variation in the shorter/longer expiries.

Figure 9: Implied volatility term structures

As with any options market, deeply in-the-money or out-of-

the-money FI ETF options will trade at a skew to at-the-

money options. Figure 10 below shows the skew for HYG

options of varying expiries and levels of moneyness

(Bloomberg function SKEW).

Figure 10: Volatility skew on select HYG options

Evaluating Interest Rate & Credit Volatility

Components in Options on Credit ETFs

Options on credit ETFs present us with the interesting

opportunity to observe how the market is pricing the relative

contributions of interest rate and credit risk to the overall

volatility of a cash bond portfolio.

In order to attempt to disaggregate and evaluate rate and

spread volatility into separate components, we may examine

comparable expiry options on similar duration interest rate

and credit spread exposures. Specifically, an HYG put option

will be compared with similar expiry options on a 5-year

interest rate swap (i.e., 3m5y payer swaption) and on the 5-

year high yield CDX contract Series 28 (i.e., a CDX payer

swaption). Figure 11 provides the details for each option.

As an example, on 5/18/17, a 3 month expiry HYG -48 delta

option (August 18 expiry, 87 strike put) was observed trading

at a midmarket price volatility of 7.62%4. In order to convert

HYG to a normalized volatility, the price volatility is divided

by the forward duration.

Given that HYG has a price vol of 7.62% and a 3 month

forward duration of 3.67, the annual normalized volatility

would be 7.62% / 3.67 = 208 bps per annum. An at-the-

money 3m5y interest rate swaption has a forward strike of

1.90% and is trading at an annual normalized implied

volatility of 65 bps per annum, or an implied yield volatility of

0.65% / 1.90% = 34.2%.

Figure 11: HYG option, CDX option, rate swaption

Finally, we observe that a 3 month -46 delta CDX payer

swaption (August 16th expiry, 105.5 price strike) is trading at

a spread volatility 35.4%, or 163 bps on an annual,

normalized basis, give a spread duration of 4.6.

Recall that options on HYG are essentially options on bond

portfolios and therefore options on portfolios of combined

interest rate and spread exposure. Given that rates and

spreads are generally negatively correlated, volatility on

HYG options should in theory lie between the volatility on

similar duration interest rate options and spread options due

to portfolio diversification effects. This of course assumes

that the portfolio characteristics of underlying exposures are

highly similar which is not the case. Despite similar durations

and spread durations, the interest rate and credit spread

exposure inherent in HYG differs markedly from the rate

swaption and CDX swaption in terms of sectors, maturities

and number of underlyings. As an example, the rate and

CDX swaptions are based on single curve point exposures –

5 years – while HYG’s portfolio contains a wider range of

maturities (i.e., one year to thirty years) as well as callable

securities. Finally, the rate and CDX swaptions are

European-style exercise while options on HYG are

American-style exercise.

50

55

60

65

70

75

0.0

8

0.1

2

0.2

1

0.2

5

0.2

9

0.5

0

0.7

5

1.0

0

Imp

lied

An

nu

al

Basis

Po

int

Vo

lati

lity

Expiry (yrs)

TLT Options Swaptions UST Bond Futures Options

Source: BlackRock, Bloomberg, as of 5/16/17

Source: Bloomberg, as of 5/16/17.

3m HYG

put

option

3m

CDX.HY

payer

3m5y

payer

Underlying duration 3.7 4.6 4.7

Underlying spot PX /

Yield88.01 107.13 1.77%

Underlying Fwd PX /

Yield87.34 105.90 1.90%

Strike 87 105.5 1.90%

Delta -48 -46 -47

Price vol. 7.62% 7.49% 3.06%

Yield / Spread vol. 67% 35.4% 34.2%

Ann Normal vol (bps) 208 163 65

Premium (bps) 130 90 63

Source: Blackrock

4. Based on a midmarket option price of $1.30, distribution yield of 5.10%, money market rate of 1.18%, and midmarket lend/borrow rate of 0.45%


The fact that HYG volatility for this particular option is higher

than both the rate and CDX swaption volatilities may suggest

that the option is either trading rich or that there is a fair

amount of dispersion among the exposures.

Nonetheless, it may still be a useful exercise to compare the

HYG option with a comparable package of rate and CDX

swaptions. The combined price volatility of the CDX / rate

swaption package would be:

Where,

w = the vector of rate and CDX swaption notional weights

V = the covariance matrix of 5-year swaps and 5y

CDX.HY spreads

V may be calculated as:

Where,

s = the diagonal matrix of implied price volatilities for the

swaption and CDX option

C = the correlation matrix of 5-year swaps and

CDX.HY.5yr spreads

First, we must convert the swaption and CDX volatilities into

price volatilities. Note that the underlying 3m5y swap

duration is 4.7 and the underlying CDX spread duration is

4.6. Accordingly,

PX_Volswap = 65 bps x 4.7 = 3.06%

PX_VolCDX = 163 bps x 4.6 = 7.49%

Since we have no direct means to imply correlation between

CDX spreads and swap rates, we may use recent historical

correlation (in this case, 12/30/16 – 5/18/17) which was

-0.21.

Assuming equal notional weights for the CDX and swap

exposures (e.g., 100% of each), the implied portfolio volatility

would be 4.54%, which is less than the 7.62% implied price

volatility for the HYG option.

Alternatively, we may imply HYG’s spread volatility (see

Appendix for derivation). Through 5/18/17, the “I-Spread” of

HYG (i.e., the Bloomberg-derived spread of HYG’s yield to

the USD swap curve) exhibited a correlation of -0.47 relative

to 5-year swap rates. Using this correlation, implied swaption

price volatility of 3.06% and a spread level of 385 bps, the

implied credit spread volatility of HYG would have to have

been roughly 8.67% in price space, 208 bps in annualized

normal volatility and 60.4% in spread volatility in order to tie

back to the total price volatility of 7.62%.

Figure 12: HYG vs. CDX Implied Spread Volatility

This of course assumes that the 3m5y rate swaption

accurately captures all of the interest rate risk in HYG (which

it does not). Nevertheless, HYG implied spread volatility

does appear to move directionally with CDX implied volatility.

Figure 12 shows a time series of implied CDX and HYG

spread volatility.

While these observations may lead us to conclude that the

HYG option is overpriced, caution is warranted given the

structural differences mentioned earlier. Nonetheless, this

general framework provides a means to monitor the

relationships between these products and identify a

significant divergence when it occurs. An example will be

covered in the next section.

Although it is useful to calculate the implied spread volatility

in more actively traded HYG options, an important

development in the ETF options market occurred in July of

2017. Options on HYGH (the iShares Interest Rate Hedged

High Yield Bond ETF) began trading in listed

markets. HYGH is an ETF that owns HYG itself and seeks

to hedge the interest rate risk of the portfolio through the use

of interest rate swaps. To the extent that the interest rate

risk is mitigated, HYGH is essentially a spread product and

options on HYGH essentially represent options on high yield

spreads. As this market matures, investors should be able

to more directly compare spread volatility as observed

through HYGH options with options on high yield

CDX. Figure 13 shows a screenshot of HYGH options.

Figure 13: Listed Options on HYGH

𝐏𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 𝐕𝐨𝐥𝐬𝐰𝐚𝐩,𝐂𝐃𝐗 = 𝐰 𝐕 𝐰 ′ 𝟏/𝟐

𝐕 = 𝐬 𝐂 [𝐬]

𝐏𝐫𝐢𝐜𝐞 𝐕𝐨𝐥 = Normalized Vol x Durationfwd

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

9/3

0/2

01

5

10/3

1/2

015

11/3

0/2

015

12/3

1/2

015

1/3

1/2

01

6

2/2

9/2

01

6

3/3

1/2

01

6

4/3

0/2

01

6

5/3

1/2

01

6

6/3

0/2

01

6

7/3

1/2

01

6

8/3

1/2

01

6

9/3

0/2

01

6

10/3

1/2

016

11/3

0/2

016

12/3

1/2

016

1/3

1/2

01

7

2/2

8/2

01

7

3/3

1/2

01

7

4/3

0/2

01

7

HYG Implied Spread Vol CDX.HY Implied Spread Vol

Source: BlackRock, Bloomberg

Source: Bloomberg as of 7/27/17


Another useful metric is the ratio between implied vs.

realized volatility. Figure 14 shows a time series of the

implied vs. trailing 30-day realized volatility for both HYG and

CDX. While implied volatility commonly trades above

realized volatility, there are times when the relationship is

narrower or wider, indicating potential value for option

buyers or sellers.

Figure 14: HYG & CDX Implied vs. Realized

Volatility

FI ETF option applications

Relative value

As the previous discussion illustrates, the potential for

relative value trades among FI ETF options, interest rate

options and credit spread options may exist. As an example,

assume that an investor decided that HYG options were in

fact rich to a portfolio of rate and CDX swaptions. Using the

values from Figure 11, an investor could short $100 notional

of an HYG put at implied volatility of 7.62%, or a premium of

130 bps. The investor could simultaneously get long $100

notional of the CDX payer swaption for 90 bps premium and

long $100 notional of the 3m5y rate payer swaption for 63

bps premium for a total outlay of 153 bps.

Assume that the implied volatility of the HYG option falls

instantaneously to the implied volatility of the swaption / CDX

option package (i.e., the HYG option’s volatility falls from

7.62% to 4.54%). In this case, the investor could buy back

the HYG option for 78 bps, and sell the swaption/CDX option

package for a profit of 75 bps (153 bps – 78 bps). This of

course excludes transaction costs and assumes that the

value of the swaption/CDX option package would have

remained unchanged.

Yield enhancement through covered calls

An investor who wished to be long the underlying exposure

but had a view that significant upside was limited may

enhance their yield by selling an out of the money call

option. As an example, on 5/18/17 an investor who was long

HYG decided to sell the 8/18/17 89 strike calls for $0.18, or

20 bps of premium.

We note that the implied forward price for HYG for the

August expiry was approximately $87.05, so the yield would

need to fall (through some combination of interest rates and

spreads) by 60 bps on a forward basis before the option

would go into the money and 5 additional bps before the

investor would lose all of the premium proceeds that were

received5. However, assuming that the option expired

worthless, the investor would have generated additional yield

of 20 bps, or nearly 80 bps annualized (20 bps x 365/92

days to expiry) of yield.

Contingent spread widening / tightening

If investors have directional views on credit spreads, they

may be able to implement such views more cheaply with

options on credit FI ETFs than CDX swaptions. As an

example, an investor who was concerned about a risk off

environment in which interest rates would rally and spreads

widen could purchase puts on LQD (iShares iBoxx $

Investment Grade Corporate Bond ETF) and sell puts on a

similar duration US Treasury ETF such as IEF (iShares 7-10

year US Treasury Bond ETF). As an example, on 5/18/17 an

investor could have gone long the 9/15/17 119 strike LQD

puts (offered at $1.55) and gone short the 9/15/17 106 strike

IEF puts (bid at $0.90). Because of the difference in

underlying durations, the investor would have short roughly

$124 notional in IEF puts for every $100 notional long in

LQD puts, resulting in a net premium outlay of $0.44.

Figures 15 and 16, respectively, summarize the trade details

and illustrate the potential terminal value payoffs.

Figure 15: Contingent spread widening strategy

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

9/3

0/2

01

5

10/3

1/2

015

11/3

0/2

015

12/3

1/2

015

1/3

1/2

01

6

2/2

9/2

01

6

3/3

1/2

01

6

4/3

0/2

01

6

5/3

1/2

01

6

6/3

0/2

01

6

7/3

1/2

01

6

8/3

1/2

01

6

9/3

0/2

01

6

10/3

1/2

016

11/3

0/2

016

12/3

1/2

016

1/3

1/2

01

7

2/2

8/2

01

7

3/3

1/2

01

7

4/3

0/2

01

7

HYG Implied/Realized Ratio CDX.HY Implied/Realized Ratio


LQD IEF Net

Expiration 09/15/2017 09/15/2017

Spot 119.9 107.06

Strike 119 106

Put 1.55 $0.90

Long / Short Long Short

Duration 8.28 7.51

BPV 3.64 7.96

Position units 1.00 1.24 (0.24)

Wtd BPV 9.85 9.85 0

Net cost 1.55 1.11 .44



Figure 16: Terminal value payoff matrix

The strategy could generate positive P/L in the event that

spreads widen and rates fall and negative P/L in the event

that spreads tighten and rates rise. Note that a CDX

swaption is driven only by spreads. In order to put the table

into perspective, a $117 price for LQD and a $104 price for

IEF would correspond to approximately 30 bps in spread

widening and a 38 bps increase in rates.

Portfolio protection

An investor managing a high yield portfolio was concerned

with credit spread widening. On March 1, 2017, this investor

could have purchased a put option on HYG or a payer

swaption on CDX.HY Series 27 (refer to Figure 16).

Between March 1, 2017 to March 22, 2017, HY spreads

widened by 59 bps based on the Bloomberg Barclays U.S.

Corporate High Yield Index OAS.

On 3/1/17, a 4/21/17 expiry 88 strike HYG put option (~50

delta) could have been purchased for a premium of 110 bps,

while a comparable (~50 delta) 4/19/17 expiry 107.5 strike

CDX payer swaption) could have been purchased for

approximately 59 bps (midmarket).

As of the 3/22/17 close, the HYG put option was being

quoted at a premium of 225 bps while the swaption / CDX

option portfolio was trading at a premium of 117 bps Figure

16 below summarizes the P/L of each individual option

position.

In this case, the HYG put option appreciated by 105% while

the CDX payer swaption appreciated by 98%, an

outperformance of 7%.

Figure 17: Hypothetical option P/L comparison

Conclusion

Fixed Income ETFs (“FI ETFs”) are a relatively recent, but

important innovation in the bond markets. As liquidity in fixed

income ETFs has increased, interest in options on those

ETFs has increased as well. Because fixed income ETF

options represent options on physical bond portfolios, they

provide exposures that are more highly correlated with many

fixed income investment strategies relative to derivative

instruments. Fixed income ETF options are providing

investors with an alternative way to attain contingent

exposure to various sectors including Treasuries, investment

grade credit, high yield and emerging markets. Investors are

increasingly utilizing them in strategies such as yield

enhancement (e.g., buy-write strategies), cross market

relative value (e.g., vs. CDX and interest rate swaptions) and

portfolio protection strategies. Investors are also utilizing

fixed income ETF options to achieve term financing through

synthetic borrow/lend strategies. While still an evolving

market, fixed income ETF options represent an important

new risk management tool for fixed income investors.

$ 117 118 119 120 121

104 $ (0.91) $ (1.91) $ (2.91) $ (2.91) $ (2.91)

105 $ 0.33 $ (0.67) $ (1.67) $ (1.67) $ (1.67)

106 $ 1.56 $ 0.56 $ (0.44) $ (0.44) $ (0.44)

107 $ 1.56 $ 0.56 $ (0.44) $ (0.44) $ (0.44)

108 $ 1.56 $ 0.56 $ (0.44) $ (0.44) $ (0.44)


IEF

Pri

ce

LQD Price 4/21/17

HYG

88 Strike

put

option

4/1917

107.5

Strike

CDX.HY

payer

3/1/2017

Underlying Spot PX /

Spread88.23 107.58

Ann norm vol (bps) 170 91

Premium (bps) 110 59

3/22/17

Spot PX / Yld 86.50 106.37

Ann Norm vol 192 97

Premium (bps) 225 117

P/L (bps) 115 58



APPENDIX

1A. Example of FI ETF option valuation

In this example, we will value a 7/21/17 123 strike put option on TLT. On 5/16/17, TLT closed at a price of 123.48 and the put

option was priced at a value of $1.80, or 146 bps. Assuming forecasted distributions of $0.26, the implied price volatility of this

option is approximately 10.35%. For illustrative purposes only. This is not meant as a guarantee of any future result or

experience. This information should not be relied upon as research, investment advice or a recommendation

regarding the iShares Funds or any security in particular.

The assumptions are as follows:

Figure 18: Lattice of TLT Yields

The corresponding single period discount factors are shown below:

Figure 19: Lattice of weekly discount factors

5/26/17

Closing price $123.48

Clean price $123.27

Vol 10.35%

Duration 17.32

Convexity 3.69

Normalized vol 0.60%

Yield vol 23%

Time step 0.02

Yield increment +/- 0.083%

Forecasted dist $0.26

YTM 2.50%

Prob up move 50.39%

Prob down move 49.61%

Note that the clean price is estimated by

backing out the forecasted distribution based

upon the number of accrual days since the

prior ex-dividend date. The portfolio yield was

calculated using the Bloomberg YAS function

net of the expense ratio of 15 bps. A flat yield

curve and one factor model interest rate

model is assumed. Up and down

probabilities were based on calibration to

current observed market values. Hypothetical

future yields, discount factors, distributions

ETF portfolio values and option values are

shown in Figures 18 through 22.

5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017

0 1 2 3 4 5 6 7 8

2.50% 2.58% 2.67% 2.75% 2.83% 2.91% 3.00% 3.08% 3.16%

2.42% 2.50% 2.58% 2.67% 2.75% 2.83% 2.91% 3.00%

2.33% 2.42% 2.50% 2.58% 2.67% 2.75% 2.83%

2.25% 2.33% 2.42% 2.50% 2.58% 2.67%

2.17% 2.25% 2.33% 2.42% 2.50%

2.09% 2.17% 2.25% 2.33%

2.00% 2.09% 2.17%

1.92% 2.00%

1.84%

5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017

0 1 2 3 4 5 6 7 8

0.9995 0.9995 0.9995 0.9995 0.9995 0.9994 0.9994 0.9994 0.9994

0.9995 0.9995 0.9995 0.9995 0.9995 0.9995 0.9994 0.9994

0.9996 0.9995 0.9995 0.9995 0.9995 0.9995 0.9995

0.9996 0.9996 0.9995 0.9995 0.9995 0.9995

0.9996 0.9996 0.9996 0.9995 0.9995

0.9996 0.9996 0.9996 0.9996

0.9996 0.9996 0.9996

0.9996 0.9996

0.9996


Forecasted distributions (including the amount of accrued interest at the final option expiry) are shown below:

Figure 20: Lattice of distributions

The future values of TLT (including future distributions) are shown below. Week 8 values were estimated through scenario

analysis of current holdings vs. projected period 8 portfolio yields. The price at a given node is derived by weighting the t+1 up

and down values by the up and down probabilities, adding any forecasted distribution and discounting back by the single

period discount factor).

PX(t) = ETF Price at time t

PX(t+1) = ETF Price 1 period ahead

p = probability of an up move in rates

q = probability of a down move in rates

distribution = Forecasted ETF distribution occurring in period t+1

DF(t,t+1) = discount factor for value at t of cash flow occurring at t+1

Figure 21: Lattice of ETF values

The option values corresponding to the projected fund above are shown below. Because of the American style exercise, the

value of the option at a given node will be the maximum of the intrinsic value (i.e., immediate exercise value) and the

discounted probability weighted values:

OV(t) = Option value at time t

OV(t+1) = Option value 1 period ahead

K = Option strike price

PX(t) = ETF price at t

p = probability of an up move in rates

q = probability of a down move in rates

DF(t,t+1) = discount factor for value at t of cash flow occurring at t+1

5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017

0 1 2 3 4 5 6 7 8

0.26 0.26

0.26 0.26

0.26

0.26

0.26

0.26

0.26

𝐏𝐗 𝐭 = 𝐏𝐗𝐮𝐩 𝐭 + 𝟏 × 𝐩 + 𝐏𝐗𝐝𝐨𝐰𝐧 𝐭 + 𝟏 × 𝐪 + 𝐝𝐢𝐬𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 × 𝐃𝐅(𝐭, 𝐭 + 𝟏)

5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017

0 1 2 3 4 5 6 7 8

$ 123.48 $ 121.77 $ 119.82 $ 118.15 $ 116.51 $ 114.91 $ 113.35 $ 111.61 $ 110.25

$ 125.35 $ 123.35 $ 121.64 $ 119.94 $ 118.27 $ 116.62 $ 114.73 $ 113.13

$ 126.98 $ 125.22 $ 123.48 $ 121.77 $ 120.07 $ 118.15 $ 116.50

$ 128.88 $ 127.10 $ 125.34 $ 123.61 $ 121.64 $ 119.95

$ 130.80 $ 129.00 $ 127.22 $ 125.21 $ 123.48

$ 132.73 $ 130.91 $ 128.86 $ 127.09

$ 134.69 $ 132.59 $ 130.78

$ 136.41 $ 134.55

$ 138.40

𝐎𝐕 𝐭 = 𝐌𝐚𝐱[ 𝐊 − 𝐏𝐗(𝐭), 𝟎 , 𝐎𝐕 𝐮𝐩𝐭+𝟏 × 𝐩 + 𝐎𝐕 𝐝𝐨𝐰𝐧𝐭+𝟏 × 𝐃𝐅 𝐭, 𝐭 + 𝟏 ]


Figure 22: Lattice of option payoffs

Note that the t=0 option value is $1.80. The example is strictly for illustrative purposes, and more robust term structure and

volatility models are likely to yield more accurate valuations.

5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017

0 1 2 3 4 5 6 7 8

$ 1.7959 $ 2.61 $ 3.69 $ 5.02 $ 6.56 $ 8.21 $ 9.83 $ 11.39 $ 12.75

$ 0.97 $ 1.52 $ 2.34 $ 3.46 $ 4.90 $ 6.57 $ 8.27 $ 9.87

$ 0.40 $ 0.70 $ 1.20 $ 2.00 $ 3.21 $ 4.85 $ 6.50

$ 0.10 $ 0.20 $ 0.39 $ 0.77 $ 1.54 $ 3.05

$ - $ - $ - $ - $ -

$ - $ - $ - $ -

$ - $ - $ -

$ - $ -

$ -


Implied Spread Volatility of Credit ETF

𝜎𝑠𝑝𝑟𝑒𝑎𝑑 =

𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒2 𝑥𝑊𝑟𝑎𝑡𝑒

2 𝑥𝜎𝑟𝑎𝑡𝑒2 + 𝜎𝐸𝑇𝐹

2 −𝑊𝑟𝑎𝑡𝑒2 𝑥𝜎𝑟𝑎𝑡𝑒

2 − 𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒𝑥𝑊𝑟𝑎𝑡𝑒𝑥𝜎𝑟𝑎𝑡𝑒 𝑥10,000

𝑆𝑥𝐷𝑠𝑝𝑟𝑒𝑎𝑑

Where,

𝜎𝑠𝑝𝑟𝑒𝑎𝑑 = Implied spread volatility of ETF

𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒 = Correlation between spread, rate

𝑊𝑟𝑎𝑡𝑒 = Weighting of swaption exposure

𝜎𝑟𝑎𝑡𝑒 = Implied price volatility % of swaption exposure

𝜎𝐸𝑇𝐹 = Implied price volatility % of ETF

S = ETF credit spread in bps (OAS or interpolated matched maturity spread)

𝐷𝑠𝑝𝑟𝑒𝑎𝑑 = Spread Duration of ETF

As an example, assume the following parameters for and HYG option and a 3m5y swaption:

𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒 = -0.47

𝑊𝑟𝑎𝑡𝑒 = 1

𝜎𝑟𝑎𝑡𝑒 = 3.06%

𝜎𝐸𝑇𝐹 = 7.6%

S = 385

𝐷𝑠𝑝𝑟𝑒𝑎𝑑 = 3.68

Inputting these parameters into the formula, the resulting implied spread volatility for the HYG option :

𝜎𝑠𝑝𝑟𝑒𝑎𝑑 = 60.4%

Standardized performance: As of 2/28/2018

Fund Name

All Data as of 2/28/18

Fund

Inception

Date

Gross Expense

Ratio1-Year 5-Year 10-Year

Since

Inception

iShares iBoxx $ High Yield Corporate Bond ETF

(HYG)4/4/2007 0.49%

Fund NAV Total Return 2.87% 3.89% 6.18% 5.47%

Fund Market Price Total Return 2.63% 3.81% 6.02% 5.51%

Index Total Return 3.13% 4.37% 6.79% 5.94%

iShares 20+ Year Treasury Bond ETF (TLT) 7/22/2002 0.15%

Fund NAV Total Return 0.04% 2.76% 5.65% 6.24%

Fund Market Price Total Return 0.01% 2.75% 5.66% 6.24%

Index Total Return 0.10% 2.83% 5.74% 6.33%

Source: BlackRock, as at 28 Februrary 2018. All returns are in USD. Past performance is not a reliable indicator of future performance.

FOR WHOLESALE CLIENTS ONLY – NOT FOR RETAIL OR PUBLIC DISTRIBUTION

3-Year

3.33%

3.23%

3.99%

-0.39%

-0.41%

-0.33%

13EII0318A-450667-1424721

Important information regarding iShares ETFsIssued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL) for the exclusive use of the recipient, who warrants by receipt of this material that they are a wholesale client as defined under the Australian Corporations Act 2001 (Cth) and the New Zealand Financial Advisers Act 2008 respectively. This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This material is not intended to be relied upon as a forecast, research or investment advice. This material is not a securities recommendation or an offer or solicitation with respect to the purchase or sale of any securities in any jurisdiction.

This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. BIMAL is a part of the global BlackRock Group which comprises of financial product issuers and investment managers around the world. BIMAL is the issuer of financial products and acts as an investment manager in Australia. BIMAL does not offer financial products to persons in New Zealand who are retail investors (as that term is defined in the Financial Markets Conduct Act 2013 (FMCA)). This material does not constitute or relate to such an offer. To the extent that this material does constitute or relate to such an offer of financial products, the offer is only made to, and capable of acceptance by, persons in New Zealand who are wholesale investors (as that term is defined in the FMCA).

BIMAL is the responsible entity and issuer of units in the Australian domiciled managed investment schemes, including Australian domiciled iShares ETFs. BIMAL is the local agent and intermediary for non-Australian domiciled iShares ETFs that are quoted on ASX and are issued by iShares, Inc. ARBN 125632 279 formed in Maryland, USA; and iShares Trust ARBN 125 632 411 organised in Delaware, USA (International iShares ETFs). BlackRock Fund Advisors (BFA) serves as an advisor to the International iShares ETFs, which are registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940. BFA is a subsidiary of BlackRock Institutional Trust Company, N.A. (BTC). BTC is a wholly-owned subsidiary of BlackRock, Inc.®. The fund(s) detailed in this material are not registered for public distribution in Australia. The laws and regulations of the fund(s) country of domicile and registration may differ from those in Australia and therefore may not necessarily provide the same level of protection to investors as schemes registered in Australia and subject to Australian regulations and conditions.

Any potential investor should consider the latest product disclosure statement, prospectus or other offer document (Offer Documents) before deciding whether to acquire, or continue to hold, an investment in any BlackRock fund. Offer Documents can be obtained by contacting the BIMAL Client Services Centre on 1300 366 100. In some instances Offer Documents are also available on the BIMAL website at www.blackrock.com.au.

An iShares ETF is not sponsored, endorsed, issued, sold or promoted by the provider of the index which a particular iShares ETF seeks to track. No index provider makes any representation regarding the advisability of investing in the iShares ETFs. Further information on the index providers can be found in the BIMAL website terms and conditions at www.blackrock.com.au.

BIMAL, its officers, employees and agents believe that the information in this material and the sources on which the information is based (which may be sourced from third parties) are correct as at the date of publication. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for this information is accepted by BIMAL, its officers, employees or agents. Except where contrary to law, BIMAL excludes all liability for this information.

References in this article to particular ETFs are for illustrative and educational purposes only. This is not a securities recommendation to invest in any particular financial product. This material may contain historical information regarding pricing, liquidity in the primary and/or secondary market and other metrics that may affect pricing like volatility timing etc. This historical information is not predictive or an indication of (i) future trading costs or prices or (ii) any level of trade execution or (iii) a particular investment outcome, and should not be relied upon as such. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts and estimates of yields or returns. While any forward looking information in this material is made on a reasonable basis, actual future results are not guaranteed and outcomes may differ materially from the information set out in this material. No representation is made that any performance presented in this material will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information that are presented herein by way of example. Reliance upon information in this material is at the sole discretion of the intended recipient. The information in this material does not necessarily reflect the views of any entity in the BlackRock Group or any part thereof and no assurances are made as to the accuracy of this information. Investors may need to seek independent advice.

Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and operations may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies. No part of this material may be reproduced or distributed in any manner without the prior written permission of BIMAL.

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