EFTA01451217.pdf

9 January 2014 FX Blueprint: Thin end of the wedge Theme 411. Vol to roll We see relative value opportunities in vol surface Changes in 3M implieds over the past year distortions; specifically buying EUR/USD FVAs, USD/JPY vol swaps and risk reversals, plus 3% AUD/USD puts cheapened with AUD/CAD KOs Trade, I Hedge ggainst event-risks with EUR/USD 2% FVA,::: Despite potential catalysts such as the US fiscal impasse and EU political uncertainty, EUR/USD implied vol remained subdued in 2013, and was 1% predominantly driven instead by rates volatility. With the USD10Y Treasury note yield expected to touch 4% on growth acceleration this year EUR/USD 0% implieds should be supported. Correspondingly, this suggests that owning EUR/USD vol remains a useful -0 8% •1% blunt hedge against tail risks with significant impact LL O on rates volatility in the US and EU. Potential it j a. g catalysts include growth momentum deceleration in § the US, an excessive rates rise following the tapering process forcing the Fed to backpedal, and ECB Son. a-orso. Br* Soambeig Rneram LP J easing in 01 on falling inflation expectations. Currently, outright long the vol swap is less attractive Vol slope for EUR/US0 is historically flat given implieds have been well bid since December. Instead, consider owing a 3M in 6M EUR/USD FVA at 16 -8.50% on the USD vega notional to exploit the 15 flatness of the implied volatility slope (chart 2). IB 13 Trade 2: Long JPY volatility on model valuation: 12 Mother approach in analyzing volatilities relates to longer-term model valuations. On our framework. 11 USD/JPY Pit realized vol is estimated at 10.6% (chart 10 3) but could potentially trend higher. Among its core parameters are the Japanese current account (+ve beta), commodity prices (-ve beta), US core inflation a (-ye beta) and the cyclically adjusted P/E ratio for US 7 equities (+ve beta). With the falls in commodities and 6 1M 6;t1 9M 12M some eventual improvement in the current account and a higher P/E ratio as the base case for this year, Sam illeambreg financeIP Wer Wpmcanyond to 0.514, 23%. 50%. Mb . 0.s. -ar Ow patNow pla blue/Ws enewenterworif Mos J5% risks to volatility tilt to the upside. Consider owning a lY vol swap, offered at -10.70% of USD notional. Modeled 11Y realized USD/JPY vol versus implied Note also that while we have been consistent advocates of AUD and CAD vol over the past year on 22% Fnlind Vol (Modell our analysis of volumes, policy divergence and IV implied Vol 20% growth rebalancing these arguments are gradually becoming less attractive from a valuation perspective. 18% Switching to long USD/JPY vol would seem to offer a 16% better risk/reward payoff. 14% 12% 10 8% 8% 90 92 94 96 98 00 02 04 OS 08 10 12 14 Sea anise as* Oweaborsi /ire* LP Deutsche Bank AG/London Page 21 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0107543 CONFIDENTIAL SDNY_GM_00253727 EFTA01451217