spx draw down study

February 3, 2014

The Buzz: Equity and vol market response to EM pressure Options Research

Global equity performance on prior EM pullbacks

EM pressure unlikely to spill over to DMOur Global Markets team highlighted two main channels through which EM weakness can affect DMs:

The trade channel: gross exports to EM are a little less than 5% of GDP for the US.

The financial channel: US banking exposures account for 5.5% of total banking assets when looking at EM overall and 1.9% when looking at the most troubled countries.

Neither channel seems large enough to create a sustained impact on the US in our view.

The volatility response has been strong Two of the largest ytd shifts in implied vol have come from Turkey and Brazil (EWZ) with moves of +11 and +7 vol pts, respectively. SPX 1m implied vol is up +4 vol pts and VIX +5. The SPX vol move appears high given the weak links between EM and the US across trade and banking channels. Low liquidity in many EM assets may be the reason, as investors may prefer to use DM markets as hedging tools during periods of stress.

Historical perspective: US and global equity performance on EM pullbacks We looked at S&P 500, VIX and global equity performance across 19 EM equity pullbacks of 5% or greater over the past decade.

The median episode saw a 12% fall in EM equities and a 6% fall in the S&P 500.

Across global equity indices, Russia, China and Brazil have tended to be hit the hardest.

In the current decline MSCI EM is down 5% and the S&P is down 3.6%.

YTD SPX move > median 1m drawdownTo get a better understanding of how the recent decline in the S&P 500 compares from an historical perspective, we look at S&P 500 peak-trough declines back to 1960. The median SPX drawdown over a 2-week period has been -2%, and -3% over a 1-month period. The max drawdown on the S&P 500 since its 2014 high of 1848.4 on January 15 has been -4%, a drop higher than the median SPX drawdowns over 2-week and 1-month periods.

Krag Gregory, Ph.D. (212) 357-3770 [email protected] Goldman, Sachs & Co.

Jose Gonzalo Rangel (212) 357-6538 [email protected] Goldman, Sachs & Co.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only.

The Goldman Sachs Group, Inc. Global Investment Research

February 3, 2014

Goldman Sachs Global Investment Research 2

The response of global equity markets to EM pressure

Our Global Markets team believes that continued pressure on EM assets is unlikely to spill over into DM markets on a sustained basis. As described in the latest Global Economics Weekly, What happens in EM (mostly) stays in EM, January 29, there are two main channels through which EM weakness can affect DMs. The first is through trade, the second is through banking and financial links.

The trade channel: Gross exports to EM are a little less than 5% of GDP for the US; therefore trade exposures seem manageable except under a very broad-based EM slowdown. Goldman Sachs US economist Jan Hatzius estimates that assuming a 10% drop in overall EM import demand as a result of the recent troubles would mechanically shave 0.5 percentage points from real GDP growth1.

The financial channel: BIS data reports overall exposure of the DM banking system to EM at around US$5trn, close to 20% of overall external positions, so DM bank exposures to key EM economies do not look too alarming. US banking exposures are likewise quite small, accounting for 5.5% of total banking assets when looking at EM overall and 1.9% when looking at the most affected countries (Argentina, Brazil, Russia, South Africa, Turkey, Indonesia and India).

Impact on US corporate profits: Our economists estimate that EM subsidiaries account for 5.5% of US corporate profits overall and for 1.0% when looking only at the most troubled economies. Again, short of a very bad outcome with significant contagion across EM and the broader global economy, this is a manageable issue in our view.

Global equity volatility response Last week, Central Banks in Turkey, India and South Africa all hiked rates. While these shifts are helpful, it is not yet clear how much stability the measures will provide without further action. Volatility has already broadened beyond EM. We analyze year-to-date equity returns and shifts in implied volatility across global equity indices and US country and sector ETFs to assess the shift in global risk sentiment (Exhibit 1).

Strongest volatility response in Turkey and EWZ: Russia, Turkey, China and Brazil top the list of ytd market declines with returns between -11% and -8%. Two of the largest ytd shifts in implied volatility have come from Turkey and Brazil (EWZ). Both are EMs with large current account deficits and 1m implied volatility levels have increased seven and five vol points respectively. While the EWZ is down 12%, implieds are only up 5.4 points, so one could argue that SPX implieds have taken a larger hit given the respective index return. SPX 1m implied vol is currently at 15.6 and has increased 4 vol points in 2014 or approximately 1-to-1 relative to the spot index move.

Why is volatility up so much in the US? As we saw last June, periods of extreme pressure in EM can spill over to DM markets on a day-by-day basis. One line of reasoning is due to liquidity. Given low liquidity in many EM asset classes, investors may use DM markets as hedging tools during times of stress or because pressure to reduce risk more generally forces selling of more liquid assets. As we highlighted in last weeks edition of The Buzz, S&P 500 1m skew has been well bid and VIX open interest and volume has been higher than one might expect given the low direct links between EM and DM trade and banking channels.

1 US Economic Analyst, A pothole for GDP growth, January 31, 2014.

February 3, 2014


Exhibit 1: Year-to-date moves across global equity markets. The graphs below show 1m 50 delta implied volatility. As of January 31, 2014.

Source: Goldman Sachs Global Investment Research.

-11

-9

-9

-8

-8

-5

-4

-4

-4

-3

-3

-3

-3

-3

-2

-2

-2

0

0

+2

4

7

3

4

2

3

2

5

5

1

4

3

5

5

3

6

3

5

2

2

-12 -8 -4 0 4 8 12

RDXUSD

Turkey

HSCEI

Nikkei 225

Bovespa

Hang Seng

Kospi 200

S&P 500

FTSE 100

NIFTY

STOXX50E

S&P/ASX 200

Russell 2000

DAX

NASDAQ 100

STOXX 600

TWSE

IBEX 35

S&P TSX 60

FTSE MIB

Return (%) 1m Impl Vol Chg.

Global Equity Indices

5

4

4

4

4

1

2

2

2

-12

-10

-9

-9

-8

-7

-7

-6

-4

-12 -8 -4 0 4 8 12

Brazil (EWZ)

China (FXI)

Korea (EWY)

Emerging (EEM)

Mexico (EWW)

Hong Kong (EWH)

Japan (EWJ)

Taiwan (EWT)

Canada (EWC)

1m Impl Vol Chg.Return (%)

Country ETFs

-6

-6

-5

-5

-4

-4

-3

+1

+3

4

3

4

4

4

4

2

5

0

-10 -5 0 5 10

Cons. Discr. (XLY)

Energy (XLE)

Staples (XLP)

Materials (XLB)

Industrials (XLI)

Financials (XLF)

Tech (XLK)

Health Care (XLV)

Utilities (XLU)

1m Impl Vol Chg.Return (%)

Sector ETFs

Moves: Dec 31, 2013 - Jan 31, 2014

40

26 2623 23 21 21

20 20 18 18 17 16 16 15 15 14 14 12 12

40 3942

35

40

34 3431 31 31

2926

24

29

2528

23

2825

1715

1915 17 17

17

12 13 119

12 1110

1210

129 9 84

9

14

19

24

29

34

39

44Current 1m implied volatility 1y High 1y Low

2725 24 23 23

1918

1513

18 18 17 17 17 16 15 14 13

38

32 3435

33 34

30

26

3033 32

27

19

30

25 25

18 17

15 13

1715

12 13 13 1210

12 12 11 1012 11 11

8 84

9

14

19

24

29

34

39

44 Current 1m implied volatility 1y High 1y Low

Where are we now? Current level of 1m implied volatility.

Country Equity Indices

Country and US sector ETFs

Moves: Dec 31, 2013 - Jan 31, 2014

February 3, 2014


Exhibit 2: Implied volatility response versus year-to-date equity returns across global indices. X axis = ytd equity return (local currency); Y axis = change in 1m 50 delta implied volatility. As of January 31, 2014.


Perspective: Avg VIX level of 14.2 in January 2014 = avg over calendar year 2013 For all of the talk about heightened levels of volatility, the market is only down -3.6% from its closing high. S&P 500 realized volatility over the month of January was 12.6 (a whopping 1.6 vol points above the full year realized volatility of 11 over 2013) and the average VIX level in January was 14.2, the exact level of the average VIX level in 2013. But all of these statistics mask an increase in volatility over the back-half of the month with five and ten-day realized volatility at 15, and Fridays closing VIX level of 18.41 was the ytd high.

Growth heals all wounds? We also think a patch of softer US data and the fall in the flash China PMI were central to the recent market declines. EM worries may have acted as a coordinating mechanism for investors already feeling overly exposed to cyclical assets during a softer patch for US and global data and this week brings fresh US data including the ISM on Monday, ECB/BOE/RBA decisions throughout the week and payrolls on Friday. While the Chinese markets are closed for the Lunar New Year Holiday, Chinas official manufacturing PMI held in at 50.5 and a solid US ISM could remove a lot of the gloom that has descended on stocks.

RDXUSD

XU030

HSCEI

N225

Bovespa

HSI

Kospi 200

SPXFTSE 100

NIFTY

Euro Stoxx 50

ASX 200

RUTDAX

NDX

Euro Stoxx 600

TWSE

IBEX

TSE60FTSE MIB

EEM

y = -0.06x + 3.53

0

1

2

3

4

5

6

7

8

-12 -10 -8 -6 -4 -2 0 2 4

1m im

plie

d vo

latil

ity s

hift

YTD return (%)

February 3, 2014


US and global equity performance during EM equity pullbacks

Our US Portfolio Strategy team examined S&P 500 performance across 19 EM equity pullbacks of 5% or greater over the past decade in US Thematic Views: EM pullbacks and the S&P 500, January 29, 2014. We extend the analysis to include VIX and global equity performance. Exhibit 3 shows the performance of the MSCI EM index in local currency terms since 2004, excluding the financial crisis. The median episode saw a 12% fall in EM equities accompanied by a 6% fall in the S&P 500. Across global indices, Russia, China and Brazilian equities have tended to be hit the hardest. In the current decline MSCI EM is down 5% and the S&P is down 4%.

Exhibit 3: Russia, China and Brazil have tended to be hit the hardest during EM equity pullbacks over the last decade Returns on MSCI EM and the other global indices are in local currency. Returns on country ETFs are in USD. Data from January 2004 to January 31, 2014.


Days MSCI EM Rtn (%) S&P Rtn (%) VIX ChgMar-04 Mar-04 23 (5) (3) 3Apr-04 May-04 35 (18) (5) 5Mar-05 Apr-05 53 (9) (6) 3Oct-05 Oct-05 15 (8) (2) 0May-06 Jun-06 35 (21) (8) 12Feb-07 Mar-07 11 (9) (6) 9Jul-07 Aug-07 25 (15) (6) 13Oct-07 Jan-08 85 (21) (15) 11Nov-08 Nov-08 16 (18) (25) 33Jan-09 Mar-09 55 (15) (25) 14Jun-09 Jun-09 22 (8) (5) 1Oct-09 Nov-09 15 (6) (5) 7Jan-10 Feb-10 28 (10) (8) 9Apr-10 May-10 46 (13) (10) 18Jan-11 Feb-11 51 (6) 3 4Apr-11 Oct-11 182 (24) (14) 21Oct-11 Nov-11 28 (8) (10) 10Mar-12 Jun-12 82 (12) (8) 11Jan-13 Jun-13 173 (13) 9 4

35 (12) (6) 9Dec-13 Jan-14 31 (5) (4) 5

DatesEquity Market Moves During EM Equity Pullbacks

19 epsiode median -18-16

-14 -14-13

-12 -11-10-10 -10 -9

-9-9 -8 -8 -8 -8 -8

-7 -7-6

-19

-15 -15 -14-14

-13-11 -11

-6

-11-9

-8-9

-5

-2-3

2

-8

-4

0

-3 -3

-6

-4

-3-2 -2

0

-3 -4

-12

-10-9 -9

-6-8

-4

-7

-7

-20

-15

-10

-5

0

5

RD

XUSD

HSC

EIBo

vesp

aXU

030

Han

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ngTW

SEN

IFTY

FTSE

MIB

Nik

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25Ko

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00IB

EX 3

5R

usse

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0D

AXTO

PIX

FTSE

100

STO

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ASD

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00ST

OX

X 60

0S&

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S&P/

ASX

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S&P

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Braz

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Chi

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Emer

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Median equity return during EM equity pullbacks over the past decade (local currency)

Median move

Current ytd move

February 3, 2014


A deeper dive into tail moves: Distributional characteristics of S&P 500 max drawdowns

In this section we look more broadly at past S&P 500 peak-trough declines, in order to get a better understanding of how the recent drop in the S&P 500 compares from an historical perspective. Using daily rolling data, we define a max drawdown to be the largest peak-to-trough decline experienced when holding an asset over a specific time interval (Exhibit 4).

Historical perspective: Back to 1960, the median S&P 500 drawdown over a one-week period has been -1%. That is 1/3rd of the median drawdown over a one-month period and about 1/7th of the median drawdown over a six-month period. We found similar numbers over the more recent sample from 1990-present.

Current episode: The max drawdown on the S&P 500 since its 2014 high of 1848.4 on January 15 has been -4% based upon closing levels from peak to local trough, a larger decline than the median SPX drawdown over past 2-week and 1-month periods.

Whereas the drawdown analysis only focuses on negative returns, exhibit 5 broadens the study and looks at the entire S&P 500 return distribution over different windows. For example, on a daily rolling basis the median one-month return on the S&P 500 is about 1.1% and a bottom decile return is -4.6%, slightly lower than the S&P 500 decline in January.

Exhibit 4: Distributional characteristics of S&P 500 peak-to-trough max drawdowns. Data from January 1960 to January 31, 2014.


Stats 1-day 1-week 2-week 1-month 3-months 6-months25 %-ile -0.43 -1.98 -3.16 -4.91 -8.70 -11.75Median 0 -1.03 -1.82 -3.08 -5.63 -7.7075 %-ile 0 -0.43 -0.96 -1.81 -3.93 -5.49

Std Dev -0.43 -1.98 -4.91 -8.70 -11.75 -18.640.43 3.00 7.99 14.32 19.44 29.280.43 0.95 1.83 3.07 4.05 8.01

Drawdown Statistics from 1960 to January 2014

(1)% (2)%(3)%

(6)%

(8)%

(14)%

(12)%

(10)%

(8)%

(6)%

(4)%

(2)%

0%

1-week 2-week 1-month 3-months 6-months

Max

imal

Dra

wdo

wn

Investment Horizon

S&P 500 maximal drawdown

75 %-ile

25 %-ile

Median

Stats 1-day 1-week 2-week 1-month 3-months 6-months25 %-ile -0.47 -2.24 -3.46 -5.08 -9.25 -12.56Median 0 -1.14 -2.01 -3.22 -5.60 -7.6475 %-ile 0 -0.51 -1.10 -1.91 -4.02 -5.48Std Dev 0.72 1.70 3.44 5.74 7.84 10.57

0.72 0.56 0.22 0.14 0.19 0.630.72 2.85 6.66 11.34 15.48 20.50

Drawdown Statistics from 1990 to January 2014

(1)% (2)%(3)%

(6)%

(8)%

(14)%

(12)%

(10)%

(8)%

(6)%

(4)%

(2)%

0%

1-week 2-week 1-month 3-months 6-months

Max

imal

Dra

wdo

wn

Investment Horizon

S&P 500 maximal drawdown

75 %-ile

25 %-ile

Median

February 3, 2014


Exhibit 5: Distribution of S&P 500 returns. The table on the right shows distributional features of SPX overlapping returns at different frequencies. Data from January 1990 to January 31, 2014.


Stats 1d 5d 10d 1m 3mMin -9.0 -18.3 -25.9 -30.0 -41.8

5 %-ile -1.8 -3.7 -4.8 -6.9 -11.910 %-ile -1.2 -2.6 -3.3 -4.6 -7.725 %-ile -0.5 -1.0 -1.3 -1.7 -1.6Median 0.1 0.3 0.5 1.1 2.7Average 0.0 0.2 0.3 0.7 2.175 %-ile 0.6 1.5 2.1 3.3 6.790 %-ile 1.2 2.7 3.7 5.4 10.195 %-ile 1.7 3.7 5.0 7.1 13.1

Max 11.6 19.1 21.6 23.4 38.8

S&P 500 Return Distributions 1990-Present (%)

0%

5%

10%

15%

20%

25%

(30)

- (2

8)

(26

) - (2

4)

(22

) - (2

0)

(18

) - (1

6)

(14

) - (1

2)

(10

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)

(6 )

- (4)

(2) -

0

2 - 4

6 - 8

10 -

12

14 -

16

18 -

20

22 -

24

Freq

uenc

y (%

)Distribution of Monthly SPX Overlapping Returns

(1990-Present)

February 3, 2014


Cross Asset Risk Barometer: EM credit spreads and FX implieds remain elevated

Exhibit 6: Outside Japan, 1m implieds remain below median levels across global indices. Credit spreads and FX 1m implieds are mixed. Commodity 1m implieds remain low. Data: January 2, 2007 January 31, 2014. Spanish and Italian 10y bond spreads in the table below refer to the spreads versus 10y German bonds. In the bar graph below we benchmark changes relative to December 31, 2013.


Equity Vol (1m Implied) Credit Metrics (Levels)

Index CurrentChg (1w)

1y Peak

Overall Peak

% to Peak Peak Date

Curr %-ile Index Current

Chg (1w)

1y Peak

Overall Peak

% to Peak Peak Date

Curr %-ile

Nikkei 225 25.7 3.5 39.0 88.8 245 27-Oct-08 70 EEMCDS 340 -1.5 378 1022 201 23-Oct-08 86TOPIX 24.1 3.3 39.0 92.3 282 27-Oct-08 64 I iTraxx Asia ex Jap. 150 2.8 171 650 334 24-Oct-08 66Switzerland 14.9 1.2 20.1 68.0 356 16-Oct-08 42 I Italy 10y Bond Spr. 221 -2.2 348 552 150 9-Nov-11 65Spain (IBEX) 23.2 0.3 27.1 77.3 234 27-Oct-08 41 SSpain 10y Bond Spr. 210 -1.5 385 633 202 24-Jul-12 58VIX 18.4 0.3 20.5 80.9 339 20-Nov-08 41 I iTraxx Senior Fin. 102 -3.5 200 361 256 25-Nov-11 35Euro Stoxx 50 19.7 1.7 23.7 75.8 284 16-Oct-08 38 EEU IG CDX 5y 82 -2.3 133 217 164 5-Dec-08 23Germany (DAX) 18.1 1.9 22.2 81.5 350 10-Oct-08 38 I US IG CDX 5y 71 -1.0 98 283 296 20-Nov-08 14Italy (MIB) 21.5 1.7 32.1 70.1 226 16-Oct-08 38 HUS HY CDX 5y 351 -0.3 478 1674 377 9-Mar-09 11S&P 500 15.6 1.1 18.7 72.2 363 20-Nov-08 38 EEU XO CDX 5y 316 0.0 528 1158 266 5-Mar-09 10UK (FTSE 100) 15.4 2.2 19.6 75.9 393 16-Oct-08 34 SSovX WE 5y 57 1.1 108 387 578 25-Nov-11 5France (CAC) 18.2 1.7 22.6 73.4 303 16-Oct-08 31 FX Vol vs. USD (1m Implied)NDX 16.3 0.9 19.7 74.1 354 20-Nov-08 30 ZZAR 18.1 2.5 20.1 70.0 287 23-Oct-08 67Russell 2000 19.6 2.6 22.4 78.4 299 20-Nov-08 29 MMXN 12.5 0.1 17.6 74.9 502 22-Oct-08 59China (HSCEI) 22.8 2.1 34.7 113.8 400 27-Oct-08 27 BBRL 13.7 0.1 18.7 75.0 447 23-Oct-08 51Em. Mkts. (EEM) 23.0 1.3 32.1 108.6 373 24-Oct-08 26 KKRW 8.3 0.5 13.3 75.4 813 24-Oct-08 35Australia 13.6 2.1 19.2 66.9 391 28-Oct-08 24 uAUD 10.7 0.4 15.2 47.8 346 27-Oct-08 33Bovespa 21.4 -0.5 33.6 95.4 345 27-Oct-08 23 uNZD 11.4 0.4 15.8 42.8 275 27-Oct-08 31Hang Seng 16.6 2.5 25.7 110.2 566 27-Oct-08 19 JJPY 9.3 -0.7 17.5 37.3 299 27-Oct-08 26Russia 25.7 3.8 30.9 161.7 529 26-Nov-08 19 CCHF 8.6 0.5 12.5 25.3 193 18-Dec-08 25India (NIFTY) 15.4 0.4 29.4 100.7 553 27-Oct-08 11 uGBP 7.2 0.1 9.8 30.8 329 27-Oct-08 25Canada 11.6 1.1 16.9 83.0 618 13-Oct-08 8 uEUR 7.1 0.5 10.0 28.8 306 30-Oct-08 16KOSPI 200 14.3 1.4 20.7 86.6 506 29-Oct-08 8 Commodity Vol (1m Implied)Taiwan 12.4 2.6 17.5 67.0 439 28-Oct-08 7 Gold 15.8 1.0 30.0 60.0 281 29-Oct-08 25

Average 18.6 1.7 25.5 87.1 380 31 Copper 15.9 2.1 27.2 83.6 427 31-Oct-08 5WTI 19.8 1.2 31.9 117.4 493 14-Jan-09 5

Since January 2007Current %-ile

(Since Jan. 2007) Since January 2007Current %-ile

(Since Jan. 2007)

0 25 50 75 100Curr %-ile

0 25 50 75 100

0 25 50 75 100

0 25 50 75 100Curr %-ile

Low - Risk Aversion - High Low - Risk Aversion - High

43 4237 37 36 34 33 32 29 27 27 26 25

21 20 20 20 1815 13 13 10 8

2417 17 16 15 14

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CreditEquity Implied Volatility (1m) FX and Commodity Implied Volatility (1m)

% C

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February 3, 2014


Skew View: Highest in the US on both an absolute and percentile rank basis

Exhibit 7: Russell 2000 and S&P 500 one-month skew are highest on an absolute and percentile basis, RDXUSD and FTSE MIB are lowest Normalized skew: (25 delta put 25 delta call) / 50 delta implied volatility. Percentiles are calculated using data from January 2, 2007 January 31, 2014.


Global US SectorIndices ETFs

1m Imp Current

Chg (1w)

Curr %-ile

Skew Current

Curr %-ile

Overall Peak

Peak Date

% to Peak Index

1m Imp Current

Chg (1w)

Curr %-ile

Skew Current

Curr %-ile

Overall Peak

Peak Date

% to Peak

Russell 2000 19.6 2.6 29 0.31 83 0.41 8/11/11 32 XXLF (Financials) 17.8 0.4 20 0.22 67 0.44 08/11/11 103S&P 500 15.6 1.1 38 0.35 83 0.48 5/21/10 37 XXLE (Energy) 17.6 2.4 14 0.22 64 0.44 12/11/07 104China (HSCEI) 22.8 2.1 27 0.17 78 0.37 8/9/11 122 XXLI (Industrials) 17.3 0.9 29 0.27 61 0.53 08/16/07 96Hang Seng 16.6 2.5 19 0.20 77 0.38 8/8/11 90 XXLP (Staples) 13.9 1.3 58 0.26 44 0.46 08/24/07 75UK (FTSE 100) 15.4 2.2 34 0.30 76 0.46 8/10/11 56 XXLB (Materials) 16.9 0.1 14 0.21 43 0.41 08/24/07 90France (CAC) 18.2 1.7 31 0.28 75 0.40 10/17/08 45 XXLU (Utilities) 12.9 -0.6 29 0.19 30 0.68 04/26/07 254Australia 13.6 2.1 24 0.28 75 0.53 12/1/08 90 XXLY (Discretionary) 16.4 1.5 29 0.21 16 0.50 08/01/07 137TOPIX 24.1 3.3 64 0.19 62 0.50 3/17/11 160 XXLV (Healthcare) 16.9 1.7 63 0.19 10 0.45 05/17/07 135Nikkei 225 25.7 3.5 70 0.19 61 0.55 3/17/11 185 XXLK (Tech) 15.1 0.1 23 0.18 9 0.44 10/29/08 139EuroStoxx 50 19.7 1.7 38 0.25 59 0.39 10/16/08 60 Average 16.1 0.9 31 0.22 38 0.48 126Germany (DAX) 18.1 1.9 38 0.25 58 0.39 8/15/07 54 International ETFsTaiwan 12.4 2.6 7 0.13 46 0.55 8/16/07 330 EEWC (Canada) 13.3 1.1 8 0.30 95 0.46 6/19/12 52NDX 16.3 0.9 30 0.24 40 0.43 5/21/10 82 EEWH (Hong Kong) 15.3 0.5 11 0.20 59 0.46 8/15/12 125 KOSPI 200 14.3 1.4 8 0.14 26 0.48 8/19/11 251 EEEM (Emer. Mkts.) 23.0 1.3 26 0.23 54 0.42 8/11/11 81Switzerland 14.9 1.2 42 0.20 23 0.38 10/17/08 93 FFXI (China) 24.5 0.6 32 0.15 48 0.34 5/21/10 121Canada 11.6 1.1 8 0.21 21 0.46 11/8/11 118 EEWY (Korea) 23.1 1.9 28 0.17 31 0.45 12/11/07 169India (NIFTY) 15.4 0.4 11 0.14 16 0.40 2/21/07 179 EEWJ (Japan) 19.4 2.8 44 0.12 22 0.58 7/17/09 382Spain (IBEX) 23.2 0.3 41 0.15 12 0.42 11/13/08 170 EEWT (Taiwan) 17.7 2.0 12 0.13 15 0.55 2/16/07 321Bovespa 21.4 -0.5 23 0.13 11 0.42 10/30/08 220 EEWZ (Brazil ) 27.3 1.0 34 0.15 10 0.44 8/11/11 201Italy (MIB) 21.5 1.7 38 0.13 6 0.40 10/17/08 206 Average 20.4 1.4 24 0.18 42 0.46 182Russia 25.7 3.8 19 0.10 6 0.32 11/17/11 203

Average 18.4 1.8 30.4 0.21 47 0.43 133

(Since Jan. 2007)Option Volatility Option Skew 1m Skew: Current %-ile Option Volatility Option Skew 1m Skew: Current %-ile

(1m Implied) (Norm. 1m 25 delta) (Since Jan. 2007) (1m Implied) (Norm. 1m 25 delta)

0 25 50 75 100Vol %-ile Skew %-ile

0 25 50 75 100

0 25 50 75 100

Vol %-ile Skew %-ile

Low - Risk Aversion - High Low - Risk Aversion - High

0.350.31 0.30 0.28 0.28

0.25 0.25 0.240.21 0.20 0.20 0.19 0.19

0.17 0.15 0.14 0.14 0.13 0.13 0.130.10

0.30

0.230.20

0.17 0.15 0.15 0.130.12

0.27 0.260.22 0.22 0.21 0.21

0.19 0.19 0.18

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

S&

P 5

00

Rus

sell

2000

UK

(FTS

E 1

00)

Aus

tralia

Fran

ce (C

AC

)

Ger

man

y (D

AX

)

Eur

oSto

xx 5

0

ND

X

Can

ada

Han

g S

eng

Sw

itzer

land

TOP

IX

Nik

kei 2

25

Chi

na (H

SCEI

)

Spa

in (I

BE

X)

Indi

a (N

IFTY

)

KO

SP

I 200

Bov

espa

Italy

(MIB

)

Taiw

an

Rus

sia

EW

C (C

anad

a)

EE

M (E

mer

. Mkt

s.)

EW

H (H

ong

Kon

g)

EW

Y (K

orea

)

FXI (

Chi

na)

EW

Z (B

razi

l )

EW

T (T

aiw

an)

EW

J (J

apan

)

XLI

(Ind

ustri

als)

XLP

(Sta

ples

)

XLE

(Ene

rgy)

XLF

(Fin

anci

als)

XLB

(Mat

eria

ls)

XLY

(Dis

cret

iona

ry)

XLU

(Util

ities

)

XLV

(Hea

lthca

re)

XLK

(Tec

h)

1m Normalized Skew Country ETFsGlobal Indices Sectors

February 3, 2014


Exhibit 8: SPY normalized skew (3m) As of January 31, 2014 market close. Normalized skew: (25 delta put25 delta call) / 50 delta implied vol.

Exhibit 9: IWM normalized skew (3m) As of January 31, 2014 market close. Normalized skew: (25 delta put25 delta call) / 50 delta implied vol.

Exhibit 10: QQQ normalized skew (3m) As of January 31, 2014 market close. Normalized skew: (25 delta put25 delta call) / 50 delta implied vol.

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.


Exhibit 11: Euro Stoxx 50 normalized skew (3m) As of January 31, 2014 market close. Normalized skew: (25 delta put25 delta call) / 50 delta implied vol.

Exhibit 12: EEM normalized skew (3m) As of January 31, 2014 market close. Normalized skew: (25 delta put25 delta call) / 50 delta implied vol.

Exhibit 13: HSCEI normalized skew (3m) As of January 31, 2014 market close. Normalized skew: (25 delta put25 delta call) / 50 delta implied vol.

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.


0.23

0.28

0.33

0.38

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

SPY

norm

aliz

ed s

kew

(3m

)

0.25

0.28

0.31

0.34


IWM

nor

mal

ized

ske

w (3

m)

0.20

0.24

0.28

0.32


QQ

Q n

orm

aliz

ed s

kew

(3m

)

0.19

0.22

0.25

0.28

0.31


STO

XX50

E no

rmal

ized

ske

w (3

m)

0.16

0.20

0.24

0.28

0.32

0.36


EEM

nor

mal

ized

ske

w (3

m)

0.00

0.05

0.10

0.15

0.20

0.25


HSC

EI n

orm

aliz

ed s

kew

(3m

)

February 3, 2014


VIX Quicks: VIX @ 18.4, Feb to Jun VIX futures shift up ~0.2 to 1.4 vol pts.

Exhibit 14: The VVIX closed last Friday at 99.7, its highest level since Oct 2013. As of January 31, 2014.

Exhibit 15: The VIX term structure remains inverted. Data as of January 31, 2014.


Exhibit 16: VIX futures across maturities. As of January 31, 2014.


60

70

80

90

100

110

120

130

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

CBOE VVIX Index

Date S&P 500 VIX Spot Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-1424-Jan-14 1,790.3 18.1 16.2 16.2 16.8 17.3 17.7 18.231-Jan-14 1,782.6 18.4 17.6 17.4 17.4 17.7 17.9 18.21 wk Chg -7.7 0.3 1.4 1.2 0.6 0.4 0.2 0.0

1 wk % Chg -0.4% 1.5% 8.6% 7.1% 3.9% 2.3% 0.8% 0.0%

VIX Futures

Term Structure of VIX Spot and VIX Futures over Time

Changes in VIX spot and futures (Jan 24 to Jan 31)

18.4

17.617.4 17.4

17.7 17.918.2

18.1

16.2 16.216.8

17.317.7

18.2

1415151616171718181919

VIX Spot Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

31-Jan-14 24-Jan-14

0.3

1.4

1.2

0.6

0.4

0.20.0

VIX Spot Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-1411

14

16

19

21

Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

Vola

tility

(%)

Jun = 17.85

May = 17.65

Apr = 17.4

Mar = 17.35

Feb = 17.6

VIX = 18.41

February 3, 2014


Hedging Landscape (95% Put Pricing): TWSE and S&P TSE 60 puts lowest cost globally

Exhibit 17: 1m 95% put pricing: TWSE the lowest globally. Indicative pricing as of January 31, 2014. Pricing (% spot). Risk: the maximum loss from buying a put is the upfront premium paid.

Exhibit 18: 3m 95% put pricing: S&P TSE 60 the lowest globally. Indicative pricing as of January 31, 2014. Pricing (% spot). Risk: the maximum loss from buying a put is the upfront premium paid.



RankOrderbyCost(%spot)

0.250.28

0.320.36

0.500.52

0.570.62

0.700.77

0.821.03

1.141.20

1.29

0.550.58

0.610.61

0.720.76

0.941.12

1.211.26

1.45

0.390.500.52

0.590.640.64

0.670.690.70

0.0 0.3 0.6 0.9 1.2 1.5

TWSES&P/TSE 60

KOSPI 200NIFTY

ASX 200SMIHSI

FTSE 100DAX

BovespaEuro Stoxx 50

HSCEITOPIX

RDXUSDNikkei 225

EWCEWHSPY

QQQEWTEWJIWMEWYEEM

FXIEWZ

XLUXLKXLPXLYXLVXLBXLEXLI

XLF

Cost of 1m 95% Puts (% of Spot)

Cou

ntry

Indi

ces

Cou

ntry

ETFs

US

Sect

or E

TFs

RankOrderbyCost(%spot)

1.031.151.17

1.431.741.781.851.89

1.981.99

2.262.69

2.823.04

3.18

1.551.741.781.81

2.092.15

2.532.83

3.013.15

3.54

1.421.44

1.651.811.82

1.961.971.992.05

0 1 2 3 4

S&P/TSE 60KOSPI 200

TWSEASX 200

NIFTYFTSE 100

DAXHSISMI

BovespaEuro Stoxx 50

HSCEITOPIX

Nikkei 225RDXUSD

EWCSPY

QQQEWHEWJEWTIWMEWYEEM

FXIEWZ

XLUXLPXLKXLVXLYXLBXLI

XLFXLE

Cost of 3m 95% Puts (% of Spot)

Cou

ntry

Indi

ces

Cou

ntry

ETFs

US

Sect

or E

TFs

February 3, 2014


Global Put Spreads: S&P TSE 60 and TWSE screen as the highest payout ratios To screen for hedging candidates, we rank order the maximum payout ratios (maximum gain/entry cost) of 1m 97.5% / 92.5% put spreads, assuming each underlier settles below the lower put strike at expiration. Risks: The maximum loss from buying a put spread is the upfront premium paid.

Exhibit 19: Maximum payout ratios for 1m and 3m 97.5% / 92.5% put spreads. Payout ratios: maximum gain / entry price assuming each underlier settles below the lower put strike at expiration. Indicative pricing as of January 31, 2014.


Country Indices Put Spread Index Level Strikes (% of spot) Strikes 1m 3m 1m 3m

S&PTSE60 97.5/92.5 765.9/726.6 0.45 1.06 11.1 4.7TWSE 97.5/92.5 8251/7827.9 0.52 1.24 9.6 4.0KOSPI200 97.5/92.5 246.6/233.9 0.56 1.10 8.9 4.5NIFTY 97.5/92.5 5937.3/5632.8 0.57 1.19 8.8 4.2ASX200 97.5/92.5 5060.3/4800.8 0.65 1.14 7.7 4.4FTSE100 97.5/92.5 6347.7/6022.2 0.71 1.30 7.0 3.8HangSeng 97.5/92.5 21484.5/20382.8 0.73 1.43 6.8 3.5SMI 97.5/92.5 7986.6/7577 0.74 1.64 6.8 3.0DAX 97.5/92.5 9073.8/8608.5 0.81 1.25 6.2 4.0Bovespa 97.5/92.5 46448/44066.1 0.87 1.33 5.7 3.8EuroStoxx50 97.5/92.5 2938.6/2787.9 0.89 1.46 5.6 3.4HSCEI 97.5/92.5 9572.9/9082 1.02 1.59 4.9 3.1TOPIX 97.5/92.5 1190.1/1129.1 1.06 1.72 4.7 2.9Nikkei225 97.5/92.5 14541.7/13795.9 1.14 1.74 4.4 2.9RDXUSD 97.5/92.5 1489.8/1413.4 1.23 1.78 4.1 2.8Country ETFsEWC(MSCICanada) 97.5/92.5 27.2/25.8 0.57 1.05 8.8 4.8SPY(SPDRS&P500ETFTrust) 97.5/92.5 173.7/164.8 0.68 1.15 7.4 4.3EWH(MSCIHongKong) 97.5/92.5 18.6/17.7 0.71 1.30 7.0 3.8QQQ(PowerSharesQQQTrustSeries) 97.5/92.5 84.1/79.8 0.72 1.31 6.9 3.8EWT(MSCITaiwan) 97.5/92.5 13.2/12.6 0.78 1.44 6.4 3.5IWM(iSharesTrustRussell2000Index) 97.5/92.5 109.4/103.8 0.90 1.44 5.6 3.5EWJ(MSCIJapan) 97.5/92.5 11.1/10.5 0.95 1.50 5.3 3.3EEM(MSCIEmergingMarkets) 97.5/92.5 37.2/35.3 0.99 1.53 5.1 3.3EWY(MSCIKorea) 97.5/92.5 57.6/54.6 1.04 1.62 4.8 3.1FXI(iSharesFTSEChina25Index) 97.5/92.5 33.7/32 1.07 1.63 4.7 3.1EWZ(MSCIBrazil) 97.5/92.5 38.3/36.3 1.24 1.74 4.0 2.9US Sector ETFsXLU(Utilities) 97.5/92.5 38.1/36.2 0.50 1.28 10.0 3.9XLP(Staples) 97.5/92.5 39.7/37.7 0.53 1.11 9.4 4.5XLK(Tech) 97.5/92.5 34/32.2 0.63 1.29 7.9 3.9XLY(Discretionary) 97.5/92.5 61.3/58.1 0.69 1.30 7.2 3.8XLV(Healthcare) 97.5/92.5 54.6/51.8 0.71 1.29 7.0 3.9XLB(Materials) 97.5/92.5 42.9/40.7 0.71 1.38 7.0 3.6XLF(Financials) 97.5/92.5 20.5/19.5 0.75 1.34 6.7 3.7XLI(Industrials) 97.5/92.5 48.8/46.3 0.75 1.34 6.7 3.7XLE(Energy) 97.5/92.5 81.3/77.1 0.77 1.42 6.5 3.5

Put Spreads 97.5% / 92.5%

Put Strikes Pricing by TermPremium (% of spot) Max Payout Ratios

11.1

9.6

8.9

8.8

7.7

7.0

6.8

6.8

6.2

5.7

5.6

4.9

4.7

4.4

4.1

8.8

7.4

7.0

6.9

6.4

5.6

5.3

5.1

4.8

4.7

4.0

10.0

9.4

7.9

7.2

7.0

7.0

6.7

6.7

6.5

0 2 4 6 8 10 12

S&P/TSE 60

TWSE

KOSPI 200

NIFTY

ASX 200

FTSE

HSI

SMI

DAX

Bovespa

Euro Stoxx 50

HSCEI

TOPIX

Nikkei 225

RDXUSD

EWC

SPY

EWH

QQQ

EWT

IWM

EWJ

EEM

EWY

FXI

EWZ

XLU

XLP

XLK

XLY

XLV

XLB

XLF

XLI

XLE

Maximum Payout Ratios Strategy: 1m Put Spread 97.5% / 92.5%

February 3, 2014


US Volatility Landscape

Exhibit 20: 50-delta implied volatility comparison across US indices Data as of January 31, 2014 market close.


1m 3m 6m 12m 24m 1m 3m 6m 12m 24m 1m 3m 6m 12m 24mImplied Volatility

Current (31-Jan-14) 15.6 15.4 15.9 16.7 17.7 19.6 19.6 19.8 20.5 21.4 16.3 16.0 16.5 17.6 19.21w Chg (since 24-Jan-14) 1.1 0.8 0.6 0.6 0.3 2.6 1.8 1.1 0.5 0.2 0.9 0.4 0.1 -0.1 0.1YTD Chg (since 31-Dec-13) 4.6 3.0 2.3 1.5 0.6 4.9 3.2 2.1 1.0 0.5 3.5 1.9 1.3 0.6 -0.1%-ile Rank (1y) 96% 90% 88% 83% 65% 95% 90% 86% 82% 69% 96% 86% 81% 60% 43%

Realized VolatilityCurrent (31-Jan-14) 12.8 10.6 10.6 11.4 12.2 16.6 14.7 14.7 15.2 16.1 15.9 12.4 12.2 12.7 14.21w Chg (since 24-Jan-14) 1.3 0.5 0.2 0.1 0.0 2.7 0.8 0.4 0.2 0.0 2.1 0.9 0.4 0.2 0.1YTD Chg (since 31-Dec-13) 3.1 0.2 0.8 0.3 0.1 3.0 0.1 1.0 0.6 0.1 6.7 0.5 1.0 0.2 0.2%-ile Rank (1y) 73% 25% 12% 18% 10% 76% 45% 36% 54% 11% 89% 41% 17% 12% 10%

Implied vs RealizedCurrent (31-Jan-14) 2.8 4.8 5.2 5.3 5.6 3.1 4.9 5.2 5.2 5.4 0.4 3.6 4.3 4.9 4.91w Chg (since 24-Jan-14) -0.2 0.3 0.4 0.5 0.3 -0.1 1.0 0.7 0.3 0.2 -1.2 -0.4 -0.2 -0.3 0.0YTD Chg (since 31-Dec-13) 1.5 2.8 1.5 1.3 0.4 1.8 3.0 1.1 0.4 0.4 -3.2 1.4 0.3 0.4 -0.2%-ile Rank (1y) 66% 96% 100% 95% 99% 69% 95% 98% 80% 98% 40% 88% 93% 95% 92%

Normalized Skew*Current (31-Jan-14) 0.35 0.37 0.38 0.37 0.34 0.31 0.34 0.33 0.33 0.33 0.24 0.26 0.25 0.26 0.261w Chg (since 24-Jan-14) -0.02 0.00 0.01 0.01 0.00 -0.04 -0.02 -0.01 0.00 -0.01 -0.01 -0.01 0.00 0.00 0.01YTD Chg (since 31-Dec-13) 0.08 0.05 0.03 0.00 0.00 0.06 0.02 -0.01 -0.03 -0.03 0.05 0.02 0.01 0.01 0.01%-ile Rank (1y) 86% 88% 83% 71% 31% 86% 90% 57% 53% 40% 58% 47% 18% 6% 8%

Term Structure

* Normalized skew: (25 delta put - 25 delta call)/ 50 delta

YTD 1m Vol Change (1 = 31-Dec-12)

1m Vol: +2.6 1y %-ile: 95% 1m Vol: +0.9 1y %-ile: 96%

Performance - 1 weekS&P 500 (SPX) Russell 2000 (RUT) Nasdaq 100 (NDX)

1m Vol: +1.1 1y %-ile: 96%

16 20 16 15 20 16

SPX RUT NDX SPX RUT NDX

1317 16

1115 12

66% 69%

40%

96% 95% 88%

86% 86%

58%

88% 90%

47%

-0.4%-1.2%

-0.6%

-1.5% -1.0% -0.5% 0.0%

SPXRUTNDX

16 15 1516 16

1718

1414 15

15 1616

17

9

11

13

15

17

19

1m 2m 3m 6m 9m 12m 24m

Impl

ied

Vola

tility

(%)

1m-6m: -0.3 (97%-ile)1m-12m: -1.1 (98%-ile)

20 19 20 2020 20

21

17 1718

1920 20

21

12

14

16

18

20

22

24

1m 2m 3m 6m 9m 12m 24m

1m-6m: -0.2 (97%-ile)1m-12m: -0.8 (98%-ile)

16 16 16 1717 18

19

15 15 1616

17 1819

10

12

14

16

18

20

22

24

1m 2m 3m 6m 9m 12m 24m

1m-6m: -0.2 (98%-ile)1m-12m: -1.2 (98%-ile)

31-Jan

24-Jan

Chart Legend

Impl Vol(%

)R

lzd Vol(%

)Skew

1y %-ile

Impl -R

lzd1y %

-ile

3m Vol Stats1m Vol Stats

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

31-Dec 5-Jan 10-Jan 15-Jan 20-Jan 25-Jan 30-Jan

SPX: 1.42 RUT: 1.33 NDX: 1.27

February 3, 2014


Global Volatility Landscape

Exhibit 21: 50-delta implied volatility comparison across global indices. Data as of January 31, 2014 market close.


Index 1m 3m 6m 12m Level 1w Chg 1y%-ileLess Rlzd Level 1w Chg

1y%-ile

Less Rlzd Level 1w Chg

1y%-ile

Less Rlzd

S&P 500 12.8 10.6 10.6 11.4 15.6 +1.1 95% 2.8 15.4 +0.8 90% 4.8 16.7 +0.6 83% 5.3

Russell 2000 16.6 14.7 14.7 15.2 19.6 +2.6 95% 3.1 19.6 +1.8 90% 4.9 20.5 +0.5 82% 5.2

Nasdaq 100 15.9 12.4 12.2 12.7 16.3 +0.9 96% 0.4 16.0 +0.4 86% 3.6 17.6 -0.1 60% 4.9

EuroStoxx 50 15.0 14.2 13.7 16.3 19.7 +1.7 90% 4.7 18.6 +0.8 74% 4.4 18.8 -0.1 30% 2.5

FTSE-100 10.3 9.8 10.1 12.2 15.4 +2.2 90% 5.1 15.0 +1.1 85% 5.2 15.7 +0.5 65% 3.5

DAX 14.1 12.7 12.3 14.8 18.1 +1.9 91% 4.0 17.2 +1.0 81% 4.5 17.4 +0.5 52% 2.7

Nikkei 225 25.9 22.0 23.5 27.4 25.7 +3.5 68% -0.1 24.0 +1.7 55% 2.0 22.3 +0.7 50% -5.1

TOPIX 23.0 17.7 20.1 24.3 24.1 +3.3 52% 1.2 22.6 +1.6 34% 4.9 21.2 +0.6 36% -3.0

KOSPI 200 14.5 13.4 12.5 13.7 14.3 +1.4 50% -0.2 15.0 +0.8 47% 1.5 16.1 +0.4 27% 2.4

Hang Seng 12.2 11.7 11.8 13.8 16.6 +2.5 78% 4.4 17.6 +1.5 87% 6.0 18.5 +0.6 85% 4.7

MSCI EEM 22.0 19.0 19.7 19.3 23.0 +1.3 86% 1.0 23.0 +0.9 88% 4.0 22.5 +0.2 68% 3.2

Bovespa 16.8 17.7 20.1 20.7 21.4 -0.5 44% 4.6 20.6 -0.7 37% 2.9 20.5 -0.2 40% -0.2

S&P/TSE 60 11.0 9.1 9.3 10.7 11.6 +1.1 59% 0.5 11.4 +0.3 25% 2.2 13.7 +0.1 19% 3.0

NIFTY 13.0 14.7 20.4 18.3 15.4 +0.4 32% 2.4 20.1 +2.7 79% 5.4 24.3 +0.8 90% 6.0

MSCI EAFE 10.2 10.2 10.6 12.4 16.2 +2.6 80% 6.1 15.8 +1.4 63% 5.6 17.2 +0.6 28% 4.8

ATM Implied Volatility

1w Return (%)

Realized Volatility 1m Implied Volatility

Performance3m Implied Volatility 12m Implied Volatility

3m Implied Volatility Level 1w % Change in 3m Implied Volatility 1m Implied Vol Change vs. Performance

24 23 2321 20 20 19 18 17 16 16 15 15 15

11

0

5

10

15

20

25

30

Nik

kei 2

25

MSC

I EEM

TOPI

X

Bove

spa

NIF

TY

Rus

sell

2000

Euro

Stox

x 50

Han

g Se

ng

DAX

Nas

daq

100

MSC

I EAF

E

S&P

500

FTS

E-10

0

KOS

PI 2

00

S&P/

TSE

60

Impl

ied

Vola

tility

(%)

14%

9% 9% 8%7% 7% 7%

6% 5% 5% 4% 4%3% 2%

-3%-6%-4%-2%0%2%4%6%8%

10%12%14%16%

NIF

TY

Rus

sell

2000

MSC

I EAF

E

Han

g Se

ng

FTSE

-100

TOPI

X

Nik

kei 2

25

DAX

S&P

500

KOS

PI 2

00

Euro

Stox

x 50

MSC

I EEM

Nas

daq

100

S&P/

TSE

60

Bove

spa

% Im

plie

d Vo

latil

ity C

hang

e

-0.4%

-1.2%

-0.6%

-0.5%

-2.3%

-0.9%

-3.1%

-3.5%0.0%

-1.4%

-0.1%

-0.3%

-0.3%

-2.8%

-2.3%

-4% -2% 0%

Implied Realized Implied Realized

S&P 500

Russell 2000

Nasdaq 100

EuroStoxx 50

FTSE-100 DAX

Nikkei 225TOPIX

KOSPI 200

Hang Seng

MSCI EEM

Bovespa

S&P/TSE 60

NIFTY

MSCI EAFE

-1.0-0.50.00.51.01.52.02.53.03.54.0

-4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0%

1w C

hang

e in

1m

Impl

ied

Vol (

%)

1w Index Return (%)

0 10 20 30 40 50 0 10 20 30 40 50

Implied Realized

0 10 20 30 40 50

February 3, 2014


The Correlation Connection: SPX 1m realized correlation, 34th %-ile vs a 5y history

Exhibit 22: S&P 500 implied and realized correlation across maturities. 5y history through January 31, 2014 market close.


1m 3m 6m 12m 24m 1m 3m 6m 12m 24mCurrent 0.37 0.41 0.44 0.47 0.51 0.33 0.28 0.28 0.28 0.315y %-ile 0.24 0.14 0.12 0.10 0.12 0.34 0.05 0.02 0.01 0.001m ago 0.29 0.34 0.38 0.43 0.51 0.31 0.29 0.25 0.30 0.341m Chg 0.09 0.07 0.06 0.04 0.01 0.02 -0.01 0.02 -0.01 -0.03

Min 0.21 0.30 0.35 0.41 0.46 0.10 0.22 0.24 0.27 0.3125 %-ile 0.38 0.44 0.48 0.50 0.53 0.29 0.32 0.33 0.37 0.46Median 0.45 0.49 0.52 0.53 0.55 0.39 0.38 0.38 0.46 0.4975 %ile 0.53 0.54 0.57 0.59 0.60 0.50 0.47 0.54 0.53 0.51

Max 0.79 0.74 0.72 0.70 0.71 0.83 0.75 0.70 0.61 0.57

S&P 500: Implied and Realized Correlation Implied Realized

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Imp Corr 1m Imp Corr 3m Imp Corr 6m Imp Corr 12m Imp Corr 24m Real Corr 1m Real Corr 3m Real Corr 6m Real Corr 12m Real Corr 24m

Cor

rela

tion

25-75 %-ile Max Min 1w Ago Current

S&P 500 Realized CorrelationS&P 500 Implied Correlation

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

May

-10

Aug

-10

Nov

-10

Feb-

11

May

-11

Aug

-11

Nov

-11

Feb-

12

May

-12

Aug

-12

Nov

-12

Feb-

13

May

-13

Aug

-13

Nov

-13

S&P 500 1m Implied CorrelationS&P 500 1m Realized Correlation

S&P 500 1m realized correlation at 34th %-ile

February 3, 2014


Exhibit 23: One-month implied and realized correlation metrics across the S&P 500 and sector ETFs. 5y history through January 31, 2014 market close.


lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr Rcorr lcorr RcorrCurrent 0.37 0.33 0.45 0.50 0.59 0.59 0.31 0.27 0.46 0.36 0.32 0.39 0.44 0.39 0.58 0.55 0.42 0.36 0.60 0.661 month ago 0.29 0.31 0.41 0.28 0.52 0.62 0.21 0.16 0.37 0.50 0.27 0.27 0.32 0.39 0.41 0.50 0.30 0.51 0.59 0.59High (5y) 0.79 0.83 1.03 0.86 0.95 0.94 0.78 0.75 0.71 0.85 0.86 0.81 0.90 0.89 0.93 0.94 0.77 0.80 1.00 1.00Median (5y) 0.45 0.39 0.64 0.60 0.66 0.58 0.45 0.39 0.44 0.40 0.45 0.39 0.57 0.54 0.63 0.59 0.43 0.40 0.62 0.59Low (5y) 0.21 0.10 0.32 0.22 0.45 0.19 0.17 0.03 0.23 0.07 0.22 0.11 0.28 0.10 0.35 0.16 0.22 0.08 0.12 0.19

SPX XLE XLF XLK XLU

S&P 500 and Sectors: 1m Implied and Realized Correlation (5y)

XLP XLY XLB XLI XLV

0.0

0.2

0.4

0.6

0.8

1.0

1.2

ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr ICorr RCorr

Impl

vs

Rlz

d C

orr (

1m)

25-75 %-ileMaxMin1w AgoCurrent

XLE XLFSPX XLK XLP XLY XLB XLI XLV XLU

0.33

0.660.59

0.550.50

0.39 0.39 0.36 0.36

0.27

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

SPX XLU XLF XLI XLE XLB XLY XLV XLP XLK

1m Realized Correlation

0.02

0.22

0.12 0.100.07

0.040.00

-0.03

-0.14 -0.14-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

SPX XLE XLY XLK XLU XLI XLB XLF XLV XLP

1m Realized Correlation, 1 month change

February 3, 2014


ETF risks

Exchange Traded Funds (ETFs) are redeemable only in specified units and only through a broker that is an authorized participant in that ETF program; redemptions are for the underlying securities. The public trading price of a redeemable unit of an ETF may be different from its net asset value; an ETF can trade at a discount or premium to the net asset value. There is always a fundamental risk of declining stock prices, which can cause investment losses.

Investors should consider the investment objectives, risks, and charges and expenses of an ETF carefully before investing. Each ETF prospectus contains such information about the ETF, and it is recommended that investors review carefully such prospectus before investing. A copy of the prospectus for all ETFs mentioned in this material can be obtained by investors from their Goldman Sachs sales representative, or from the offices of Goldman, Sachs & Co., 85 Broad Street, New York, NY, 10004, Attn: Prospectus Dept. (1-212-902-1394). Prospectuses are also available from ETF distributors.

Goldman Sachs is an authorized participant in each ETF mentioned in this material and participates in the creation and redemption of shares of each ETF mentioned in this material. Goldman Sachs, as an authorized participant or otherwise, acquires securities from the issuers of the ETFs mentioned in this material for the purposes of resale. As of January 30, 2014, Goldman Sachs has the following positions: EEM short, EWC long, EWH short, EWJ short, EWT short, EWW long, EWY long, EWZ short, FXI long, XLB long, XLE long, XLF long, XLI long, XLK long, XLP long, XLU long, XLV long, XLY long. Professionals who authored this material have no financial interest in any ETF mentioned in this material. One or more affiliates of Goldman Sachs is a specialist, market maker or designated liquidity provider for the following ETFs: EEM, EWH, EWJ, EWT, EWW, EWY, EWZ, FXI, XLB, XLF, XLP, XLU, XLV, XLY.

February 3, 2014


Disclosure Appendix Reg AC We, Krag Gregory, Ph.D. and Jose Gonzalo Rangel, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

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For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at the settlement price on expiry.

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February 3, 2014


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February 3, 2014


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