Hedging Costs at Two-Year Low as Crude Surges: Russia Overnight

The cost of hedging against swings
in Russian equities has fallen to its lowest level in almost two
years relative to emerging-market stocks on wagers oil’s longest
rising streak since May will bolster the country’s shares.

Implied volatility, used to gauge the cost of options, on
the Market Vectors Russia ETF is 1.52 points higher than on the
iShares MSCI Emerging Markets ETF, according to data compiled by
Bloomberg based on three-month contracts with an exercise price
closest to the exchange-traded funds. That’s the smallest gap
since September 2011. The exchange-traded fund for Russia, the
biggest in the U.S. that tracks the country’s shares, jumped 5
percent last week, the most since September.

The Bloomberg Russia-US Equity Index of Russian stocks
traded in New York has gained 10 percent since reaching a one-year low June 24 as higher oil and a weaker ruble boosts the
outlook for the world’s biggest energy exporter while slower
inflation paves the way for interest-rate cuts. The MSCI
Emerging Markets Index added 7 percent in that span, trailing
Russia as Citigroup Inc. raised the country to overweight,
citing the lowest valuations among 21 emerging markets tracked
by Bloomberg.

“The Russian market seems to be the best out of the worst,
and systemic underweight in Russia finally is starting to be
closed at the expense of other regions,” Simon Mandel, the
director of emerging Europe equity sales at Auerbach Grayson
Co. in New York, said by e-mail. Investors are paring bets for
declines “in anticipation of some support of the market.”

U.S. Trading

The Bloomberg Russia-US Equity Index rose 1.4 percent on
July 12, extending the weekly advance to 6.5 percent. OAO
Rostelecom, Russia’s largest fixed-line operator, rose 3.9
percent to a six-week high.

Futures (VEA) on Russia’s RTS Index slipped 0.1 percent in U.S.
hours. The Market Vectors Russia ETF rose 0.2 percent to $26.44.
The RTS Volatility Index, which measures expected swings in
futures, fell 2.6 percent to 25.48.

Oil, Russia’s biggest export, rose for a third week as U.S.
corporate earnings topped analysts’ estimates and U.S.
inventories tumbled.

Russia’s economy grew 1.6 percent in the first three
months, the slowest pace since 2009, and annual inflation slowed
to 6.9 percent in June from 7.4 percent in May, approaching the
central bank’s target of no more than 6 percent.

Economists are predicting the central bank will cut the
main short-term repurchase rate, currently at 5.5 percent, 0.25
percentage point in the third quarter and another quarter point
by year end, according to a Bloomberg survey conducted in June.

Less Bearish

Options traders have pushed bearish bets on Russian
equities to a five-month low relative to bullish ones. The ratio
of puts giving the right to sell the Market Vectors Russia ETF (RSX)
versus calls to buy slipped to 1.53-to-1 on July 10, the lowest
since January, data compiled by Bloomberg show.

The number of bullish options outstanding climbed 12
percent from the June 21 options expiration to 66,210 on June
10, according to the data. During that time, open interest for
puts rose 2.2 percent to 101,019.

January $30 calls, with an exercise price 13 percent above
the last close, were the most owned among bullish contracts,
followed by August $32 calls, the data show. The three contracts
with the largest open interest were bearish.

Implied volatility for three-month options with an exercise
price closest to the Russian ETF slipped 19 percent from its
nine-month high on June 25 to 25.27 at the end of last week,
data compiled by Bloomberg show. During that time, the measure
for the emerging-markets ETF lost 8 percent to 23.75.

United Co. Rusal (486), the world’s largest aluminum producer,
sank 2 percent to HK$2.93 in Hong Kong trading as of 10:16 a.m.
local time. The MSCI Asia Pacific Index gained 0.3 percent.

To contact the reporter on this story:
Lyubov Pronina in London at

To contact the editors responsible for this story:
Brendan Walsh at
Stephen Kirkland at

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