EFTA01364942.pdf

3 December 2013 US Derivatives Spotlight [Figure 3: Current premia for long-dated SPX calls and call spreads is low 35% •Current Names 30% , 25% - 20% - 15% - ri 1096 +1 6% - 0% SPX 18M SPA 3aM SPA 6011,1 SPA 18N1 SPA 36M SPA 61.,'M SPX 60M 100% 100% 100% 107.5% 120% 140% 100%-140% Sant Niathe Afera.6., Ann teiresea rho a ew.fenennen,a...rmenenwn.4 am. csOcieeenporno Inc. .M200.7 m• nw , 'Werra ete trawes breinteretro) nat &XI110, PECenth en. cal COCO,preen SACO .b+2.003 The .We Nisei Me If -low nets rept...WsMe mean *Om"» prem.. wire W..7063 ScOans non" . Me ante hM a the ram 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). [Figu re 4: SPX long-deted ATMS implied vols are near historically low levels... Figure 5: ...as are rate implied volatility and rate-equity correlations* 50% 250 -1 45% ,,,,,,- 16M 200 40% —36M 150 35% — soM 100 30% 50 25% 0 2096 Or* -f0 ••• ••••••3M AIM* implied volatility for 5Y swaption 1596 —3M realized correlation between 5`ir rates and SPX 10% -100 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 May.05 May-07 May-09 May-11 May-13 Sant Devaab &ea Sant DessfteSs44. trocvntee9, first, tp %14 War feete0 CCnein," es 'tear for e(”<*o' area ro Over treistarMey 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-0055501 CONFIDENTIAL SDNY_GM_00201685 EFTA01364942