EFTA01435956.pdf

DB FX Trade Idea EURZAR-USDZAR Correlation Swap Trade Idea • Sell 6m EURZAR-USDZAR correlation swap at 80% (USD payout) • Sell ly EURZAR-USDZAR correlation swap at 80.5% (USD payout) Rationale • EURZAR-USDZAR implied correlations are close to the highest levels since 2007 (see graph 1) • This has been driven by ZAR implied volatilities trading at their highest levels relative to EURUSD volatility since the financial crisis (see graph 2) • Since 2007 the highest 6m realized correlation is 94% and the lowest is 41%. For ly the highest is 93% and the lowest is 48%. Looking at shorter dated metrics, 3m realized correlation has fallen from recent highs to now sit close to current strikes (see graphs 3 & 4) • The correlation swap provides a limited loss way of fading elevated ZAR volatilities and buying cheap EURUSD volatility, which could perform in the event of any Eurozone concerns such as the Italian election Graphs Graph 1: EURZAR-USDZAR implied correlation at highs 100% 40% 50% 60% 70% 80% 90% Graph 2: ZAR vols elevated compared to EURUSD vols 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 EURZAR-USDZAR 6m implied corr EURZAR-USDZAR ly implied corr Graph 3: 6m realized correlation vs. strike 100% 20% 30% 40% 50% 60% 70% 80% 90% -20 -15 -10 -5 0 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 EURUSD-EURZAR ly implied vol spread Graph 4: ly realized correlation vs. strike 100% EFTA01435956 EURZAR-USDZAR 6m real corr EURZAR-USDZAR 3m real corr 80.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20% 30% 40% 50% 60% 70% 80% 90% EURUSD-USDZAR ly implied vol spread EURZAR-USDZAR ly real corr EURZAR-USDZAR 3m real corr 80.5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: Deutsche Bank, Bloomberg Finance L.P. Disclaimer: http://globalmarkets.db.com/new/content/3045.html EFTA01435957