EFTA01365334.pdf

3 December 2013 US Derivatives Spotlight [Figure 3: Current premia for long-dated SPX calls and call spreads is low 35% • Current Preemie 30% A 26% - 20% 15% - 10% A 6% - 0% SPX 18M SPX 36A1 SPX 60M SPX 18M SPX 36M SPX 60M SPX 60M 100% 100% 100% 107.5% 120% 140% 100%-140% Saw Dad.. Sent AMPS.)AN" regrew. etre Otteenc•Pawn the magnumant/monlmon a fly al gottenpans "not.45.+2007 M-to tes weary AY Osionc•Innivin ale 75th a-4 nth ins* at to w onoropreave swan-2m The Ms bevies's'', Wow On tepronno rho ~snarl eptonpans OnctarrNat SOO an renown?. one — a Mt warty The main driver of the depressed option premium is due to SPX spot implied which has declined sharply throughout 2013 (see Figure 4). Further downward pressure on SPX long-dated call premia is also due to low rate volatility and the decreased correlation between rates and equities (longer maturity equates to greater sensitivity to the volatility of the forward vs. short-dated options, see Figure 5). I5°" Figure 4: SPX long-dated ATMS implied vols are near historically low levels... :Figure 5: ...as are rate implied volatility and rate-equity (correlations' 250 46% 1 18M 200 40% 1 —36M 150 35% 1 —60M 100 30% 4 50 25% 0 20% .1 -50 —3M ATMF implied volatility for 5Y swaption 15% -100 —3M realized correlation between 5Y rates and SPX 10% I Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Mtiy.05 May-07 May-09 May-11 May-13 Mem Oath* Brit Sow*. Detach* Sent Stant*. /WM* LP WO SPAY /0~ combos at • wow ft...new/Ay to cniusiblatiy A second effect is due to the SPX forward itself which is materially lower vs. the spot level. This makes the SPX option premia appear low optically. The following equations help understand the drivers of the forward: Forward = Spot + Cost of Carry Cost of Carry = Spot x (Interest Rate - Repo - Dividend Yield)x Time Page 4 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0056038 CONFIDENTIAL SDNY_GM_00202222 EFTA01365334