1. July, 2011. Volatility Trading Opportunities: MexDer IPC vs. CMEG E-mini

2. Background & fundamentals Volatility Trading The objective of this type of arbitrage is to take advantage of differences between the implied volatility of the option, and a forecast of future realized volatility of the option's underlier. In volatility arbitrage, volatility rather than price is used as the unit of relative measure, i.e. traders attempt to buy volatility when it is low and sell volatility when it is high. Why should you trade volatility? Stabilizing effect in a portfolio Reduce risk

3. Background & fundamentals Volatility Trading: Several opportunities available within IPC Equity Index IPC versus S&P 500 E-mini IPC versus NASDAQ E-mini IPC versus E-mini Dow IPC versus Nikkei 225 And other combinations using these contracts.

4. IPC Equity Index Options IPC Options Underlying asset is the Future on the Index calculated by Bolsa Mexicana (Mexican Exchange). The index is known as the IPC and is market capitalization weighted from stocks selected from different sectors of the Mexican economy. Quoted in index points, e.g. 38,500 Notional (Face) Value is the index multiplied by MXN $10.00 Trades in quarterly maturity months (Mar, Jun, Sep, Dec) Cash settled. 4

5. VIMEX VIMEX, Mexican Volatility Index. This indicator measures the expected volatility for the Mexican Stock Market in a short term. The VIMEX ® is calculated with the Implied Volatilities of the IPC (of the Mexican Exchange) Options prices listed in MexDer, for this reason, the Derivatives Exchange is the one who calculates and publishes it for the public domain.

6. Compare apples to apples When trading two contracts of different underlying it is important to trade in common terms. With Equity Index Options the common denominator is the strike price notional value. To calculate an strike price notional value is easy: Option’s strike price x contract multiplier = Strike price Notional Value (NV) Note: The contract multiplier is fixed but the strike price is not. Therefore the NV will change with another strike price. Comparing different Equity Index Strike Options

7. Compare apples to apples Option’s strike price x multiplier = strike price NV Let’s calculate the strike price NV for S&P E-mini options when: Options Strike Price = 1,280 Multiplier = $50.00 1,280 x 50.00 = $64,000 per contract Now will calculate the strike price NV of the IPC options when: Options Strike Price = 38,000 Multiplier = $10.00 MXN 38,000 x 10.00 = $380,000 MXN per contract Comparing different Equity Index Strike Options

8. Compare apples to apples Convert IPC strike price NV to equivalent $USD terms. On January 14 th USD/MXN rate was 0.08262 or 12.1028 Pesos per Dollar: IPC strike price NV x exchange rate = IPC USD strike price NV 380,000 MXN x 0.08262 = $31,395 USD Now we can compare that to the NV of S&P E-mini’s and calculate the proper hedge ratio. Hedge Ratio = NV (E-mini) / NV (IPC) HR = 64,000 / 31,395 = 2.03, or rounded to 2:1 IPC to E-mini Comparing different Equity Index Strike Options

9. E-mini Futures – IPC Futures

10. Selling IPC ATM Volatility

11. Strategy: Betting on narrowing spread Assuming on 1/14/2011 we: Bought 10 ATM ESM1C 1,280 at 60.50 [VIX=15.46] Sold 20 ATM ISM1C 38,000 at 192.84 [VIMEX=20.41] Spread = 4.95 On 2/15/2011 we: Sold 10 ATM ESM1C 1,280 at 74.75 [VIX=16.37] Bought 20 ATM ISM1C 38,000 at 84.66 [VIMEX=16.47] Spread = 0.10 MXN/USD: 2,334 MXN * 0.08262 = $192.84 1,020 MXN * 0.083 = $84.66 Selling IPC ATM Volatility

12. P&L 1/14/11 Bot 10 ESM1C 1,280 at 60.50 Sold 20 ISM1C 38,000 at 192.84 2/15/11Sold 10 ESM1C 1,280 at 74.75 = Gain of $14.25 Bot 20 ISM1C 38,000 at 84.66 = Gain of $108.18 E-mini:$14.25 x 10 contracts = $142.50 IPC: $108.18 x 20 contracts = $2,163.60 Net gain = $2,306.10 Total gain of $2,306.10 versus a naked long ESM1C gain of $142.5. Selling IPC ATM Volatility

13. July, 2011. Volatility Trading Opportunities: MexDer IPC vs. CMEG E-mini