EFTA01393184.pdf

the volatility indexes underlying implied volatility options, there is a risk that there may be a divergence between the exercise settlement value and an indicative value cal- culated at the opening on the date on which the exercise settlement value is being determined. (Please refer to the discussion in Chapter IV under the heading "Variability Indexes" for the definition of the term indicative value and a description of the method that Is used to calculate an exercise settlement value for implied volatility options.) It is to be expected that there will be at least some diver- gence between the exercise settlement value for expiring implied volatility options and an indicative value calcu- lated at the opening on the same date because the open- ing price for each of the options series that is used to calculate the exercise settlement value will typically be at either the bid or the ask quotation, depending on the forces of supply and demand for that series, and not at the mid-point between the bid and ask quotations. This divergence may represent a significant percentage of the vare for the implied — volatility index if the-k is of supply and demand cause all or most of the series to open on the same side of the market. 12. Strategies involving the purchase and sale of options on a variability index or strategy-based Index are inherently complex and require a thorough understand- ing of the concepts that are measured by these indexes. Investors must understand the method used to calculate the index in order to understand how conditions in the market for the component securities used to calculate its value may affect the value of the index. Investors may fail to realize their investment objective even if they have correctly predicted certain events if they do not under- stand how those events may or may not affect the level of the index. The component securities of an implied volatil- ity index are put and call options (not stocks. which are the component securities of stock indexes). A realized variability index, on the other hand, measures the actual volatility of an index and is calculated directly from the values of the reference index. There is no assurance that predicted volatility as measured by a particular Implied volatility index will correspond to the actual volatility of the reference index or to measures of predicted volatility calculated using other methods. A strategy-based index may be calculated from the prices of multiple component securities of different types. such as in the case of a buy- write index measuring the return of a strategy that involves transactions In stocks and options. The return from a particular strategy as measured by a strategy- based index may differ from the actual returns that an investor following that strategy achieves, because of assumptions regarding transactions and the failure to 158 CONFIDENTIAL - PURSUANT TOdEEBCIRMIO96643 P. 6(e) CONFIDENTIAL SDNY_GM_00244827 EFTA01393184