BAML incorporates OTC trading in new risk index

rollercoaster
Getting help with taking risks

The GFSI index, a cross-market global financial measure of risk, hedging demand and investment flows has been launched by Bank of America Merrill Lynch.

Aimed at traders, investors and asset-allocators, the index illustrates differences in market, solvency, liquidity, and tail risk that are priced daily in financial markets, helping investors to uncover relative value opportunities across assets and their derivatives.

“Risk appears to have become as important as returns,” said Benjamin Bowler, global head of equity derivatives at Bank of America Merrill Lynch global research in New York. “Knowing which risks are important and, more importantly, how to hedge them without overpaying is key.”

The index measures risks not normally visible in public markets by incorporating assets trading in the over-the-counter market. In addition to allowing investors to identify the cheapest tail hedges, the index was launched to help them identify market risks earlier and more accurately than commonly used risk indicators such as the Vix index.

The GFSI index aggregates more than 20 measures of stress across five asset classes measuring three financial market risk indicators: cross-asset measures of volatility, solvency and liquidity; investor appetite for risk; and hedging demand, implied by the skew of equity and currency options.

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