EFTA01401386.pdf

Subject: RE: Idea for US equity hedging... [C] From: Paul Morris a> Date: Tue, 09 Jun 2015 11:15:39 -0400 To: Daniel Sabba Cc: Stewart Oldfield Classification: Confidential Did you speak to him about ways to implement his bullish views on the stocks he sent over?, he could play that various ways as you know but need to show him thx Paul Morris Managing Director Deutsche Bank Private Bank Offic Cell: From: Daniel Sabba Sent: Tuesday, June 09, 2015 11:06 AM To: jeffrey E. Cc: Paul Morris; Stewart Oldfield; Vahe Stepanian; Ariane Dwyer; Richard Kahn Subject: RE: Idea for US equity hedging... [C] Classification: Confidential Most investors are familiar with the usual negative correlation between bonds and equities, often relying in bond/equity portfolio allocations as a hedge. They believe their portfolios to be protected because they have observed equities sell-offs being followed by bond rallies and vice versa. We wanted to follow-up on the hedges below in light of the recent price action. Last week we observed two trading days with sell-offs in both bonds and equities in the US. We think this is scenario worth noting given (i) the upcoming Fed lift-off, (ii) the potential reversal of a secular bull market EFTA01401386 in bonds, which started in the 1980ies, (iii) elevated equity valuations, a potential result of monetary policy stimulus. With the hedge below, an investor can get up to 5x their premium in the event of a shallow sell-off in both equities and bonds. Happy to discuss in further details. From: Daniel Sabba Sent: Wednesday, June 03, 2015 9:43 AM To: 'jeffrey E.' Cc: Paul Morris; Stewart Oldfield; Vahe Stepanian; Ariane Dwyer; 'Richard Kahn' Subject: Idea for US equity hedging... [C] Classification: Confidential Jeffrey, We wanted to share this US equity hedging idea with you. We think it is relevant since US equity indices are near historic highs, implied volatility in US equities is close to historical lows and there is potential for Fed liftoff in September. David Bianco published the following on 5/22 (full report attached) about the possibility of a 5%+ pullback in the summer months: "We believe the probability of a 5%+ dip is high this summer and our tactical call remains Down given the S&P now at an even higher PE than a year ago, heightened uncertainty in 10yr yields, weak earnings growth and continued soft economic data. We haven't had a 5%+ dip this year. Historically 5%+ dips are common and happen at least once a year since 1960, except 1964, 1993 & 1995. It has been 916 trading days (3.6 years) since a 10% correction. Selloff triggers could be a further rise in 10yr yields especially if UE keeps falling amidst slow economic growth and Fed remains unclear on first hike timing, or a jump in the dollar upon the Fed expressing firm intentions to hike in Sept." EFTA01401387 With that said, we looked at OTC equity put spreads contingent on higher rates. We priced in-the-money versions which would obtain its maximum payout (over 5x premium) with a 5% sell-off in SPX and higher lOy US swap rates (CMS, 25bps over its forward level). Indicative transaction terms (as of 06/03/2015): Client buys: OTC SPX 105%/95% Put Spread contingent on lOy USD CMS > atmf+25bps at expiry Notional: USD50mm Expiry: 18 Dec 2015 Offer (mid): 2.00% (1.60%) Ref vanilla: 4.30% Ref SPX future: 2115 Ref lOy fwd: 2.54% SPX Implied volatility levels close to historical lows {cid:[email protected]} Please let us know if you would like to discuss. Best regards, Daniel Daniel Sabba Key Client Partners Deutsche Bank Securities Inc. Tel. Mobil EFTA01401388 Email All trade execution information contained herein is being provided as an accommodation at your request in advance of your receipt of the official trade confirmation(s). Additional trade detail information available upon request. The terms of the trade(s) may be subject to change prior to settlement, and therefore the official trade confirmation(s) and account statements issued by Deutsche Bank shall govern. Deutsche Bank is not responsible for any discrepancy between the informal execution report and the official trade confirmation(s) or account statements. EFTA01401389