EFTA01453771

but in the very short term I see EURUSD higher because: i) Despite ECB preparing the markets for QE, the price action of EURUSD (broadly unchanged) has been quite bullish compared to what one would expect ii) Speculators don't appear long EURUSD to us. Majority are short or flat. iii) implied volatility is 5.25% (offer for 2week options) which is very very low historically. So this is a penny option, highly convex, pain trade bet against other speculators betting on QE If my view is wrong 6bp is lost. If i'm right id plan to exit in a week making 4-6x Scenario Anal sis - Premium in bp of EUR notional EURUSD call option prices Spot 1.382 Spot At exp Ire 2w 1.42 141 142 145 1.41 71 76 84 1.4 0 24 37 1.39 0 4 11 1.382 0 1 4 « 4bp is mid mkt, offer is 6bp 3) Position for a Stronger Dollar - lyear view (now or soon) Buy 1y expiry European style digital binary option on EURUSD struck 5% below spot rg 21% of payout (which i think is too cheap) Current strike (spot - 5%) would be 1.3120 At expiry if EURUSD has fallen by more than 5% from current levels the option payout is EUR1mm. Upfront premium is EUR210k. The option is liquid and can be unwound at any time. i) Yellen has done a poor job of communicating the Fed's thinking but its increasingly clear the Fed will brake later than usual ii) Betting on higher US interest rates in the rates market isn't cost effective because the forward curve is already pricing in higher rates iii) The Dollar hasn't appreciated yet because short rates in the US haven't risen meaningfully iv) THE KEY POINT - FX volatility is very low in currency pairs like EURUSD where central bank policy on each side is increasingly diverging. The low vol makes this bet inexpensive to put on. v) Because FX vol is so low betting now or soon with a one year time horizon costs very Mlle. id rather be early than late here vi) i prefer 1y expiry because this trade could take 6-12mths to play out 1`if EURUSD VOL: Low - but then again most most vols are What I like about EURUSD is that central bank policy on each side is diverging CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 111585 CONFIDENTIAL SDNY_GM_00257769 EFTA01453771