EFTA01409658.pdf

Subject: Fw: Hi Jeffrey - follow-up on options for rates steepness in USD [I] From: Stewart Oldfield < › Date: Tue, 14 Oct 2014 16:03:26 -0400 To: Daniel Sabba ‹ > Classification: For internal use only you may as well keep me copied on these. Paul will set up a meeting for both of us with Jeffrey in the next couple of weeks. Looks like you may have a trade right off the bat. Nice (Embedded image moved to file: pic12653.gif) Stewart Oldfield, CFA, CAIA Director Deutsche Bank Trust Company Americas Deutsche Asset & Wealth Management 345 Park Avenue, 10154-0004 New York, NY, USA Tel. +1(212)454-2881 Email (Embedded image moved to file: pic30097.gif) Securities offered through Deutsche Bank Securities, Inc. Forwarded by Stewart Oldfield/db/dbcom on 10/14/2014 04:02 PM From: Paul Morris/db/- dbcom@DBAMERICAS To: Date: 10/14/2014 03:47 PM Subject: Fw: Hi Jeffrey - follow-up on options for rates steepness in USD [I] EFTA01409658 Classification: For internal use only Forwarded by Paul Morris/db/dbcom on 10/14/2014 03:47 PM From Daniel Sabba/db/- dbcom To: [email protected], Cc: Paul Morris/db/dbcom@DBAMERICAS, Vahe Stepanian/db/- dbcom@DBAmericas, Tazia Smith/db/dbcom@DBAMERICAS, Date 10/14/2014 03:44 PM Subj Hi Jeffrey - follow-up on options for rates steepness in USD [C] ect: Classification: Confidential Jeffrey, EFTA01409659 It was a pleasure to talk today and looking forward to meeting when you get back to NY. Please see below for the rationale of the 5slOs steepener trade - I just repriced this for USD lbn notional. As discussed, you pay 15bps upfront for an at-the-money-forward (ATMF) CMS option struck at 54.5bps. The current spot is at 71bps, so it is 16.5bps above the ATMF strike. Last week, before the FOMC minutes were released, the spot was 20bps above the ATMF strike level. The current roll is not as high as last week but, it still represents very cheap optionality which carries roll benefit and unlimited upside in the event of curve steepening at expiry. Purchase options on USD curve steepness (CMS 5slOs ATMF curve caps) USD curve steepness close to 5 year lows: (Embedded image moved to file: pic23542.gif) Indicative terms: Notional USD lbn Client buys CMS curve cap on 5slOs in USD Expiry 1 year CMS 5slOs Strike ATMF (54.5bps) CMS 5slOs Spot 71bps Upfront premium offer (mid): 15bps (13.5bps) Terminal Payout: Notional*Max (CMS 5slOs Terminal Rate-Strike, 0) Settlement: Cash Trade Rationale and Implementation: Potential catalysts for steepening in the short term frame include: Economic recovery and a pick up in inflation expectations, which are likely to be a prerequisite for the market to sustainably price a Fed tightening cycle Conversely, given inflation breakevens are currently depressed, if a negative economic shock were to happen, it could imply a more accommodative Fed, which is commonly associated with a steeper curve Deutsche Bank research on total return bond fund returns and rates derivate positioning suggests US steepeners are less crowded among real money investors While a steepening view can be articulated in various delta-one ways, CMS curve caps allow clients to express a steepening view with limited downside, where the maximum downside is the premium paid. The terminal payout is Notional*Max(Terminal Rate-Strike,0) Because forwards are currently inverted, clients are able to purchase options with a higher positive roll from forwards to spot than the premium initially paid Overview on current market dynamics: This year's USD interest rate curve flattening in 5slOs can be decomposed into three distinct phases: EFTA01409660 (i) the market repricing Fed tapering in the lOy sector (ii) China's intervention on USDCNY, building up official foreign reserves (iii) increase of deflation and QE expectations out of Europe Hypothetical PnL at Expiry (Embedded image moved to file: pic19910.gif) One lylOy/lOy swap rate vs. ly5y/5y swap rate (as of 10/07/2014) (Embedded image moved to file: pic04365.gif) Positioning research suggests steepeners are less crowded among real money investors (Embedded image moved to file: pic09734.gif) (DB GM Research: Global Fixed Income Weekly ? 10/03/14) Please note all prices are indicative and subject to change without notice. Best regards, Daniel (Embedded image moved to file: pic04060.gif) Daniel Sabba Director I Key Client Partners Deutsche Bank Securities Inc Deutsche Asset & Wealth Management 345 Park Avenue, 26th Floor New York, NY 10154 Tel. +1 212 454 0857 Mobile +1 Email Derivatives are financial transactions based upon one or more predetermined market factors where periodic payments (or a one-time lump-sum payment) are made by each of the parties to the transaction based upon the value of the market factor or factors. The amount of the payment(s) will either be set at a fixed amount or fluctuate as the value of the underlying market factor fluctuates. The underlying market factors are items or variables which are subject to market fluctuations; for example, interest rates, currency exchange rates, assets, stock prices, stock index levels, commodities or a combination of one or more of these factors. Derivatives are normally used either as a hedging device or as an investment vehicle. Over-the-counter (OTC) derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. In certain transactions, you could EFTA01409661 lose your entire investment or incur unlimited loss. (Embedded image moved to file: pic18566.gif) EFTA01409662