Deutsche Bank

Deutsche Bank Markets Research North America United States Derivatives S' US Derivatives Spotlight The Compelling Case for Long-Dated SPX Calls The current combination of low volatility levels and embedded protection makes longer-dated call strategies attractive to position for further equity appreciation. With call premia near decade-long lows, upside options offer benefits compared to long equity positions or can be used to safely enhance core cash equity holdings. In this note we examine the pricing drivers of SPX 18- to 36-month expiry call options and compare historical returns of different strategies and to outright equity. Broadly, call strategies have exhibited better risk-adjusted returns than holding a cash position in the SPX index. Long-dated calls on the SPX index are priced attractively There are two main drivers of long-dated call premia, both of which help make pricing compelling right now • Long-dated SPX spot implied volatility is extremely low. The depressed rates volatility and low correlation between rates and equities create further downward pressure on the implied volatility of the SPX forward • The SPX forward itself is depressed vs. the spot level. The currently low level of interest rates and relatively high implied dividend yields have resulted in negative carry costs and have pressured the SPX forward, which makes the option premia appear low optically Choosing a long-dated call strategy: findings from our 10-year backtest • We find that call spreads tended to have the highest risk-adjusted returns among the strategies studied. • Strategies involving selling 1M options to finance the longer-dated calls have performed better than equity and outright calls. These results are consistent with our previous research showing that implied volatility risk- premium is typically rich for short-dated options. However, short 1M options underperform in strongly rallying markets, such as the SPX this year. • Rolling a long call (spread) position before expiry would have generally (but not always) resulted in higher risk-adjusted returns. Rolling prior to expiry reduces the negative effects of time decay, since shorter-dated options lose time value quickly Sensitivity of call premia and relative magnitude of risks While delta is the main driver of call P/L longer-dated options have a higher exposure to other risks. We compare the impact on current SPX call premium from changes in spot, time, implied volatility, rates, and dividend yields. Risks headline The loss from a long option or long option spread position is limited to the net premium paid. Please note that hypothetical backtest results are neither an indicator nor a guarantee of future returns. Date 3 December 2013 Sau l Agganval VA Deutsche Bank Securities Inc. Note to U.S. investors: US regulators have not approved most foreign listed stock index futures and options for US investors. Eligible investors may be able to get exposure through over-the-counter products. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P) 054/04/2013. EFTA01077898 3 December 2013 US Derivatives Spotlight The basics of long-dated calls Better risk-adjusted returns at an attractive price Buying long-dated call options offers benefits to investors seeking equity exposure. They allow for continued upside participation and at the same time provide a floor should the broad market decline rapidly. In this note, we show that longer-dated SPX call strategies have historically provided better risk- adjusted returns compared with buying and holding the broad index. There are several key features of call options that should appeal to a wide range of equity investors: • Current pricing: Long-dated calls on the SPX index are priced attractively with levels for both ATM and OTM calls near decade-long lows (see Figure 1) • Embedded risk management characteristics: Call 'delta' (sensitivity of the call's price to spot moves) increases in a rally and decreases in a sell-off. Thus investors get longer as the market moves higher and less long as the market sells off. This convexity property of long options is especially attractive in a market pullback and is a reason why long-dated calls result in higher risk-adjusted returns in our backtests vs long equity only Figure 1: Current long-dated call option premium near decade-long lows 30% 25% 20% 15% 3 10% 5% 0% Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-03 Sage* ox•ale Batt The note is divided into three parts: • Why current pricing on long-dated calls is attractive relative to history • How different long-dated call structures have performed historically, including partly cheapening long-dated calls by selling higher strike calls with the same maturity and by selling 1M calls • What is the relative magnitude of the different risks inherent in long call positions Page 2 Deutsche Bank Securities Inc. EFTA01077899 3 December 2013 US Derivatives Spotlight Low rates, high dividend yields, and low implied volatility levels make long-dated calls historically cheap Figure 2 shows the drivers of call option pricing, which are now at levels that make current pricing attractive. The colors signify whether these values are low (green) or high (red) within their history since Jan-03. We also annotate the boxes if higher values of these factors affect call premia positively ('+') or negatively ('—'). For example, dividend yields are currently high from a historical perspective (red) and increasing yields would lead to lower call premia ('—' sign). Thus we can infer from the figure that the currently elevated dividend yields help lower call premia. Most of these drivers of long-dated call prices are addressed below. Figure 2: Low vol, low rates, and high implied dividend yields depress call premia' Spot Volatility (+) Rate Vo latility I+) L otatility (+) Others* (+) Vibes netidai cOndand veaf W. ten vounMy aNe sax iweitno.ertmr Saectv Deutsch, ea.* Strike i Call Premia L Tenor Forward/Spot I+) ;Ill (-) Dividend Yield Repo (-) Figure 3 shows the distribution of call pricing for different maturities and strikes over the past ten years. As you can see current pricing for these calls strategies is near the bottom of its range over the past decade. It is particularly notable that levels are near lows for the range of maturities and strikes. 1 The boxes are cedar coded depending on the percentie rank of current values ccenpared with their histories over the past eight years. Green color is for a low percentile rank and red is for high. Deutsche Bank Securities Inc. Page 3 EFTA01077900 3 December 2013 US Derivatives Spotlight Figure 3: Current premia for long-dated SPX calls and call spreads is low 35% - • Current Premia 30% 25% 20% 15% - 10% - 5% - 0% i? t SPX 18M SPX 36M SPX 60M SPX 18M SPX 36M SPX 60M SPX 60N1 100% 100% 100% 107.5% 120% 140% 100%-140% Scance. Axascht Bane &tit .I.An Aron 'WOW( th) ckvance &Waxy, et. murmur,' encimoonwn of me CAA OPeOP. perm ti veva Jon-2003 N 1O tois egworan• SN, thstnce bolvrtnv, en 160— 260 IltrOMIAN 01 the co: opt, perms MX'S .An-1002 The Me a-ewe°, m0 PO low MS fepretere tAt medal. aW won prow we am.2003 Sokl dons TWORNIf the currentlevel al Sy in: have 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). Figure 4: SPX long-dated ATMS implied vols are near historically low levels... 50% 45% 40% 35% 30% 25% Sault*. Deuesehe &ea ( Figure 5: ...as are rate implied volatility and rate-equity correlations* 250 200 150 100 50 0 -50 -100 May-05 — 3M ATMF implied volatility for 5Y swaption — 3M realized correlation between 5Y rates and SPX May-07 May-09 May - 1 1 Sweet ilkatere &ea 8 ,00M0011) Paws LP - WO MOM MOMS 00rnit ISM at a NOW ke ArnOtd ON to data unatatlgiby May-13 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. EFTA01077901 3 December 2013 US Derivatives Spotlight US interest rates have been depressed by the iterations of QE programs and dividend payments have been increasing in the post financial crisis recovery. The low level of rates (see Figure 6) and relatively high implied dividend yields (see Figure 7) have resulted in negative carry costs and have reduced the SPX forward (the spot value 'grown' by the carrying costs, see Figure 8). Please note that the effect of the forward on the call premia is 'optics' - dividends will reduce the price of the underlying (and call options as well if actual dividends are higher than priced into options). However, as shown in Figure 2, rates rising from these low levels and/or dividend yields falling will result in a mark-to-market gain on the long call position, all else equal. Figure 6: Low rates... Figure 7: ...and relatively high SPX implied dividend yields... 6% 5% 3.0% 2.8% —36M 2.6% —60M 4% 2.4% 3% 2.2% 2.0% 2% —36M US Swap Rate 1.8% 1% —60M US Swap Rate 1.6% 0% 1.4% Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Source: Asset Bet. Blositiknntaut LP I Swett Dame/ * &sit IFigure 8: ...have depressed SPX forward levels 120% 115% 110% 105% 100% 95% — 36M SPX Forward/Spot — 60M SPX Forward/Spot 90% Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Sae= Deutsche Sent Anecdotally, a less material impact on SPX call premia is due to repo rates which decreased significantly at the beginning of 2013 and have rebased to a much lower range since then. The lower repo level and elevated repo volatility are factors that have pushed call prices slightly higher from where they would otherwise be. Deutsche Bank Securities Inc. Page 5 EFTA01077902 3 December 2013 US Derivatives Spotlight The low forward combined with depressed long-dated implied volatility has resulted in the most attractive pricing on long-dated call options in many years. As an example of how marked this difference can be, if we compare prices of 60-month maturity SPX ATMS calls on 30-Jun-03 and 11.Oct-13, two periods with the same implied volatilities but very different forwards, the difference in premium is —4.5% (19.1% vs. 14.6%). However, if we compare the option prices in terms of the forward (ATMF strikes), then the above mentioned spread in the premium disappears. Historical performance of long-dated calls Option strategies have had better risk-adjusted returns vs index performance In this section, we look at the historical performance of different long-dated call strategies?. We compare the performance of the option positions vs. the total return on the SPX Index. These backtests3 focus on SPX 18M and 36M options. We chose the 18M maturity for our backtests since many investors prefer exchange-listed options to OTC and 18M is the farthest listed maturity for which we had consistent data for the SPX. We chose the 36M maturity to study the results for even longer-dated options whose vega exposure does not decay as rapidly. Our results are largely similar among the two maturities studied and include those for • Calls and call spreads either held to maturity or rolled° after some time has passed in the life of the option • Call diagonals (buy long-dated calls financed by selling 1M calls) where the long-dated call is either held to maturity or rolled after some time has passed in the life of the option We find that: • Call spreads tend to have the highest risk-adjusted return, even after scaling their delta higher to match the initial delta of just the long call leg • Selling 1M 2% annualized premia calls to finance the purchase of long-dated calls has had better risk-adjusted performance compared with equity or outright calls • Rolling long-dated calls and call spreads prior to expiry has generally (but not always) resulted in higher risk-adjusted returns than holding them to expiry The table below displays the performance of these strategies in up and down market periods. The option strategies have tended to suffer less during market downturns but have underperformed in rising markets. This is expected as call options have a delta of less than 1- for every $1 change in the SPX, the call price will change by less than 1 (by their delta value to be exact), all else equal. 2 8acktests are for the Dec-02 to Sep-13 period. We assume a transactions cost of 0.30 vols for outright long dated calls and for those calls financed by selling 1M puts. In addition, we assume that the 1M options are sold at the bid. We assume a transaction cost of 0.20 vols for call spreads, which is applied to the closer-to-the-money strike. M an example, it the 18M ATM call has a vega or volatility sensitivity of 4, then we add 0.3x4=S1.2 to the mid ATM call price as transaction cost. 3 The backtests below assume that a long investor replaces his long delta-one position with an equivalent notional of calls (that is 1 outright call or spread contract per 1CO 'shares' in the index). All excess tunds are invested in short-term Treasury securities. 4 We roll the long-dated calks after lard and 2i3rds of the option's time has passed. Page 6 Deutsche Bank Securities Inc. EFTA01077903 3 December 2013 US Derivatives Spotlight Figure 9: Comparing performance under rising and falling markets: Equity vs. various 36M call option strategies rolled after 24M Dna to Oft4/7 Return Volatility Oats Is. Return Volatility IlMr•011 to Sopli Return Volatility Apra to Septa Return Volatiety Bake to Sett Pattern VolatlAy RatNol EMMY 133% 128% 663% 376% 22.3% 18.7% MS% 11.3% 80% 203% 39.2% Outright ATM 83% 10.4% .220% 11.7% 10.3% 11.4% 13.6% 7.9% 6.1% 44.2% 89rWak AIM -8% 5,8% 50% -113% 6.7% 11% 7.5% 4.5% 2.0% 4.5% 13,4% 70,1% 89rWak AIM - 2% 7.9% 86% -18.1% 9.8% 10.1% 10.3% 10.1% 5.2% 53% 9.5% 55.8% Spread: ATM • 1/4 2% 9.1% 96% .20.1% 113% 98% 106% % 7.1% 6.5% 10.2% 63.6% $a ca'' Anon.. (Pant ['bomber' Para, LP Since the total return (price appreciation + dividends) on the SPX has been positive over the period studied (Dec-02 to Sep-13), the options strategies5 studied have underperformed the SPX (see Figure 10). However, after adjusting retums by the level of realized volatility (return/realized volatility) for the entire period, the option strategies had better performance when compared with equity°. The lower portfolio volatility of the call strategies is a key attraction for investors who are seeking equity returns but are put off by the typically high volatility of equity portfolios. Figure 10: Comparing performance of equity with various 36M calls rolled after 24M 260 — Equity 240 Outright: ATM Spread: ATM - 6% — Spread: ATM - 2% 200 —Spread: ATM - 1M 2% 220 180 160 140 120 100 80 Dec-02 Dec-04 Dec-C6 Dec-08 Dec-10 Dec-12 Sant' OC4MMO Beat illocenteg Ammo LI In the following section we show results for only a select number of strategies studied. The results are largely consistent across other strategies studied and are available in the Appendix. Strategies involving selling 1M options to finance the longer-dated —ATM calls have had higher risk-adjusted returns than equity and outright calls Strategies involving selling 1M options to finance the longer-dated near-the- money calls have had slightly better performance than outright calls: these had 5 Please note that a 6% premium strategy targets trading a strike that nets a total 6% premium for the specific maturity (not annualized). Only the premium for the 1M 2% options are annualized: strikes are chosen corresponding to 2%/12 premium. 8 Please see the Appendor for an expended table of all strategies studied Deutsche Bank Securities Inc. Page 7 EFTA01077904 3 December 2013 US Derivatives Spotlight slightly higher returns at slightly lower volatility vs. outright calls. However, they did have equivalent to slightly higher volatility than some of the call spread strategies (see Figure 11 and Figure 12). Figure 11: 36M calls and spreads rolled after 24M, Dec- 02 through Sep-13 25% y cy lox • 5% - 0% SPX Total Return • 36M ATM Call 36M ATM call •_a Shon 1M 36M 6% V 2% Mn. Prem. Cal Prem. Call ♦ 36M 6% 36M ATM Cal a Neill. Call . Short 38M Sheet 36M 2% 2% Prem. Ca Prem. Cal 0% 2% 0% 6% 8% AnilLialiZed Bettie, Sawn. DAIWA. Bate. AVOOmbtvg Avant., LP Figure 12: 18M calls and spreads rolled after 12M, Dec- 02 through Sep-13 25% 20% 75 1 s% 0% 18M 5% Prem. Call e 18M ATM Call Short 1M 2% ♦ 18M ATM Cal Mn. Prem. 18M 5% • • Short 1M Call ♦ Prem. Gllt 2% Ann. 18M 5% Short 18M 1% Pratt Call Prem. Cal Prem. Call SPX Total Return • 0% 2% a% 8% Amualized Return SOW*: ANOVA& Cm* AVO0mOtg Aiwa LP 8% These results are consistent with our previous research showing that implied volatility risk premium is typically rich for short-dated options'. That is, 1M implied volatility tends to be higher than 1M realized volatility. So, selling 'expensive' 1M upside call options to finance the purchase of longer-dated calls has generally been attractive. Strategies selling 1M SPX calls have not performed recently Looking again at Figure 10 above, strategies selling 1M calls have, not surprisingly, "banked" close to the entire 2% annualized premia only during market downtums (for instance, compare the performance of ATM calls and ATM — 1M 2% calls for the Oct-07 to Mar-09 period in the table). In the rising markets of Dec-02 to Oct-07, these strategies "banked" -418% to 1.2% of the 2% premia depending on the strategy. However, the bull market between May-09 to Sep-13 saw strategies selling 1M options have lower retums than buying outright calls. This is largely due to the Apr-13 to Sep-13 period, which saw large up and down moves that resulted in large losses from some of the short 1M call that were rolled every month while the long-dated call was up relatively little (see Figure 13). 7 Please see The DNA of Ovenvnttng - A US Perspective. 02-Alx-2013. contact Page 8 Deutsche Bank Securities Inc. EFTA01077905 3 December 2013 US Derivatives Spotlight Figure 13: The Apr-13 to Sep-13 period has seen significant underperformance from financing long-dated calls with 1M calls 115% -4 E 103% 101% 99% 97% 95% Dec-02 Dec-04 Soweto: Deutsche B Bloomberg Seranoi LP Dec-06 Dec-08 Dec-10 Dec-12 The backtest period is very representative for 1M risk The main risk of the short 1M call occurs in violent rallies. Figure 14 shows that the frequency of sharp rallies in our backtest period is comparable to that from the prior —50 years. If anything, we tended to see slightly higher occurrences of big 1M rallies in our backtest period. 'Figure 14: Distribution of 1M SPX returns 14% 12% t 10% 8% O 6% 0 • 4% 2% 0% — Jan 195010 Nov-2002 — Dec 2002 to Sep-2013 eit144#V4 4 4t?e,t:i 4 4 4 4egai441,e,tegeg4g 5 4 1M Return Bucket Sant Dame» &M. BloontOoryy Searcy IP Call spreads have had better risk-adjusted performance than all other strategies studied Spreading a call option by selling a higher strike call reduces net delta exposure. So, call spreads tend to have lower returns in rallying markets but provide better downside protection (see Figure 9 above). However, looking at the entire backtest period between Dec-02 and Sep-13 (both up and down markets), we find that call spreads tended to have annualized returns largely in line with outright call positions. Not surprisingly, call spread strategies experienced much lower volatility and higher risk- adjusted returns (see Figure 15 to Figure 18). Deutsche Bank Securities Inc. Page 9 EFTA01077906 3 December 2013 US Derivatives Spotlight Figure 15: Call spread returns similar to calls (36M calls and spreads rolled after 24M)... 9% 8% - 7% - C 6% tc 5% 1: 4% E 3% 2% 1% 0% Outright: Spread: Spread: Outright: Spread: ATM ATM - 6%ATM -2% 10% 10% - 2% EquitY Saint Dames Bank BlositeorgFatanoi LP Figure 16: ... but with much higher risk-adjusted returns (36M calls and spreads rolled after 24M) 80% 3-1 70% > 60% a ea .„i 50% 1 40% &30% 'Et, 20% _ 2 10% 0% Equity Outright: Spread: Spread: Outright: Spread: ATM ATM - 8%ATM - 2% 10% 10%-2% sows. Dames Bank Blositeorg Arancv LP Figure 17: Call spread returns similar to calls (18M calls Figure 18: ... but with much higher risk-adjusted returns and spreads rolled after 12M)... 9% q4% g3% 2% 1% 0% 1.1 Equity Outright: Spread: Spread: Outright: Spread: is ATM ATM - 3%ATM -1% 5% 5% - 1% Saner Deutsch, Seat avant.; 'nonce LP (18M calls and spreads rolled after 12M) Z 90% • 80% j 70% 60% 50% 40% La" 30% 20% 10% 0% 1 Equity Outright: Spread: Spread: Outright: Spread: ATM ATM - 3%ATM - 1% 5% 5% - 1% Sane: Ofterche Sank &combo" Amoco LP Given the attractive levels of long-dated calls currently, investors may still want to stick with outright call options rather than spreads to maintain a higher delta. However, an alternative approach could be to scale up the call spread notional and have a similar delta exposure (at least initially) to an outright call. In Figure 19 and Figure 20, we look at the risk-adjusted returns for different call and call spread strategies after we scale up the call spread notionals. We assume that the investor trades an equivalent initial delta on the call spread as an outright call, which is then only rebalanced on the roll date of the long- dated call. For instance, if on trade date the 36M ATM call option has a delta of 0.50 and the 36M ATM-6% premia call spread has a delta of 0.20, we would buy 2.5x contracts of the call spread instead of each call contract. In the historical backtests, returns and risk-adjusted returns are both better for call-spreads after scaling to equivalent delta as the outright call. The higher delta notional does increase the volatility more than the return of the call- spread strategies and drives down the return/vol slightly from what's shown in Figure 16 and Figure 18. Page 10 Deutsche Bank Securities Inc. EFTA01077907 3 December 2013 US Derivatives Spotlight Figure 19: Annualized retums/realized volatility for 36M calls and spreads rolled after 24M, Call spread notional scaled by delta 60% 55% 50% 45% 40% 35% 30% Outright: Spread: Spread: Outright: Spread: ATM ATM - 6% ATM - 2% 10% 10% - 2% Sawa 0.44701,0 an Figure 20: Annualized retums/realized volatility for 18M calls and spreads rolled after 12M, Call spread notional scaled by delta 70% 65% 60% 55% 50% 45% 40% 35% 30% 1 Outright: Spread: Spread: Outright: Spread: ATM ATM - 3% ATM - 1% 5% 5% - 1% Same. Oxman eat* Roll prior to expiry Figure 21 and Figure 22 show that rolling the call spread position before expiry would have generally (but not always) resulted in higher risk-adjusted returns, across many different strategies*. Rolling prior to expiry allows you to reduce the negative effects of time decay, since shorter-dated options lose their time value quickly. Rolling early also allows you to re-strike the calls, which is especially important for options that have become far out-of-the-money. Rolling will rebalance the delta exposure higher in these cases. However, note that rolling early will result in higher transactions cost. I Figure 21: Annualized returns/realized volatility for 36M spreads 100% 90% • Spread: ATM - 1M 2% • Spread: ATM - 6% . 80% . Spread: 6% - 2% 70% - 60% - 50% - 40% - 30% - 20% - 10% • 0% 1 cc • cc • cc • cc • cc • cc 0 CC I Figure 22: Annualized retums/realized volatility for 18M spreads 120% 100% 80% 60% 40% 20% 0% • Spread: ATM - 1M 2% • Spread: 9% - 3% Spread: 5% - 1% cc • cc •0 ▪ 15 6 a 15 CC CC • CC CC cc CC CC CV • A 3 2 CV Sown Deveseht Bag Sweat Devesthe Ban* 8 Results for rolling prior to expiry hold for outright calls as well Deutsche Bank Securities Inc. Page 11 EFTA01077908 3 December 2013 US Derivatives Spotlight Understanding volatility, rate, and dividend yield risks for long-dated calls In this section we provide a more in-depth look at how implied vols evolve after a spot rally and also how changes in rates and dividends impact the price of calls. Vega - implied volatility sensitivity Buyers of options are long vega, and an increase in implied volatility will result in an increase in the price of a call option. Vega is proportional to time-to- maturity: longer-dated options have higher vega and as time passes the sensitivity of the options to changes in implied volatility declines. Investors holding outright long calls will benefit from the delta exposure in a SPX rally, but will likely suffer from implied volatilities decreasing in two ways: • Tenn-structure effect: As time passes, the implied volatility will slide down the typically upwards-sloping implied volatility term-structure, all else equal. • Skew effect: Implied volatility changes are negatively correlated with spot changes (see Figure 24: spot higher, implied volatility lower). Thus, as spot prices move around, the reference implied volatilities will change. However, the most recent six months have seen long-dated fixed-strike (not ATM) implied volatilities rise slightly as the market has rallied (these would correspond to points in the upper right quadrant in Figure 24), a situation that has helped these call positions doubly. In Figure 23 and Figure 24 we look at the relative magnitude of the decrease in fixed-strike implied volatilities contingent on a market rally. It is notable that the fixed-strike implied volatilities change has been on the order of 1-2 vol points in our table. Not surprisingly, longer-dated options have lower volatility sensitivity to spot price moves, and a bigger move is associated with sharper implied volatility declines. Figure 23: Median change in fixed-strike implied vol given a minimum spot move over the period (Dec-02 to Sep-13) Spot Move (Greater Than) Median Change in Vol After Spot Move Over Period IBM Call After 36M Call After 60M Call After 6M 18M 24M 0% -0.3% -0.1% -0.2% 5% 4.8% -0.3% -0.3% 10% -1.0% -0.7% -0.5% 15% -1.4% -1.1% -0.7% 20% -2.0% -1.7% -1.0% -60% -45% -30% -15% 0% 15% Spot Return 30% 45% Figure 24: Regressing spot changes and changes in 36M fixed strike implied vols over the subsequent 6M 15% 10% San Deutsch, Bert I Sane:Deutsch: Bern 1 y = -0.1299x + 0.004 60% Page 12 Deutsche Bank Securities Inc. EFTA01077909 3 December 2013 US Derivatives Spotlight The figures below show the simulated P/Ls for 36M and 18M ATM options under different volatility and spot change scenarios after one-year has passed. The price sensitivity to spot moves does tend to dominate any volatility P/L. Also, you can see for the 36M trade that if fixed strike vols and spot are unchanged then your option loses a fifth of its value due to time decay (the 18M option loses almost half its value in the same situation). A 5% up move in spot and a 100 bps decline in vol leaves the 36M ATM call option holder relatively flat. Figure 25: Simulated P/L of 36M ATM options after 12M have passed under different volatility and spot change scenarios (all else held the same) %ChinnIn Spat -10% 4% 0% 5% 10% -5.00 -81% -87% .48% -22% 8% ♦.50 -79% -85% -45% -20% 11% ♦.00 -77% -83% -42% -17% 13% -350 -78% 40% -40% -14% 16% -3.00 -74% 68% -37% -11% 19% -2.50 -72% 45% -34% 4% 21% -2.00 -70% -53% -32% -6% 24% 450 -68% -51% -29% -3% 27% -1.00 -66% -48% -27% -1% 29% -0.50 43% -46% -24% 2% 32% 0.00 -61% -43% -21% 5% 35% 0.50 -59% -41% -19% 8% 38% 1.00 47% -38% -16% 10% 40% 1.50 -56% -36% -13% 13% 43% 2.00 -53% -34% -11% 16% 46% 2.50 -50% -31% -8% 19% 48% 3.00 -48% -29% 4% 21% 51% 3.50 .46% -26% -3% 24% 54% 4.00 -44% -24% 0% 27% 57% 4.50 -41% -21% 3% 29% 59% 5.00 -39% -19% 5% 32% 62% Figure 26: Simulated P/L of 18M ATM options after 12M have passed under different volatility and spot change scenarios (all else held the same) %amp In Spat -10% 4% 0% 5% 10% 4.00 -99% -91% -68% -23% 39% ♦.50 -98% -90% -66% -21% 40% ♦.00 -98% -88% -84% -20% 41% -3.50 -97% -87% -62% -18% 42% -3.00 -98% -85% 40% -16% 43% -2.50 -98% -84% 48% -14% 44% -2.00 -96% -82% 46% -12% 45% -1.50 -94% -81% -54% -10% 47% -1.00 -93% -79% 41% -8% 48% -0.50 -92% -78% -49% -6% 49% 0.00 -91% -78% -47% .4% 51% 0.50 40% -74% -45% -3% 52% 1.00 -89% -72% -43% -1% 54% 1.50 -88% -71% -41% 1% 56% 2.00 -87% -68% -39% 3% 57% 2.50 -88% -67% -37% 5% 59% 3.00 -84% -68% -35% 7% 60% 3.50 43% -64% -33% 9% 62% 4.00 -82% -62% -31% 11% 64% 4.50 -81% -60% -29% 13% 66% 5.00 -79% -58% -27% 15% 67% Sacak Dautsche Bane saws Atutszne Ban* Deutsche Bank Securities Inc. Page 13 EFTA01077910 3 December 2013 US Derivatives Spotlight Rho - interest rate sensitivity Interest rate levels drive the pricing of call options in two ways. • The discounting or present value effect: the present value of the expected payoff from the call at maturity is lower. • The forward effect: The cost of carry is lower and hence the expected spot is higher at maturity. This increases the value of the call. The net effect of these two can be seen by the greek 'rho', which measures the sensitivity of an option with respect to interest rates. Rho is positive for a call option, meaning that the net effect of a rise in rates will be an increase in the call price. The price increase due to the forward rising is higher than the discounting effect. Longer-dated options have higher rate sensitivity (see Figure 27). This makes sense as the forward will be affected more for longer-dated options (as the rate is scaled by the time to maturity). Thus as an option becomes closer to maturity (all else equal), its exposure to changes in interest rates falls rapidly. Because of the changing nature of the interest rate sensitivity (see Figure 28) and the relatively small impact on P/L, investors shouldn't trade long-dated calls solely to gain exposure to higher rates. However, the currently low rates (and low rates volatility) do lead to optically better relative pricing for investors wishing to be long, and any rate increase will have a positive impact on call premia (see Figure 29 and Figure 30). 'Figure 27: Call prices increase with rising rates 18% 17% - 16% - 15% - It 14%- 3 13% - CI 12%- 11% 10% 9% 0% Saeav &notch, ean. s36M ATM Call 1% 2% 3% 4% 5% 6% Interest Rate 'Figure 28: Rho for an ATM call increases with maturity 8% - z 7% - 6% - 5% , 4% cc 3% 2% 05 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 Time to Maturity (years) Saecelbolsch, earn The figures below show the simulated P/Ls under different rate and spot scenarios after one-year has passed in the life of the trade. You can see for the 18M trade that a 5% up move in spot and a 100 bps increase in rates would cover the time value lost over the following year, all else equal. Page 14 Deutsche Bank Securities Inc. EFTA01077911 3 December 2013 US Derivatives Spotlight Figure 29: Simulated P/L of 36M options after 12M have passed under different rate and spot change scenarios (assumes vols slide down the curve) %Cinn In Spot Figure 30: Simulated P/L of 18M options after 12M have passed under different rate and spot change scenarios (assumes vols slide down the curve) % Change In Spot -70% 6% 0% 5% 10% -10% -6% 0% 5% 10% -0.60 454% .46% -25% 0% 29% -0.50 -92% -77% 49% -7% 48% 0.00 451% -43% -21% 5% 35% 0.00 -91% -76% .47% .4% 51% a 0.50 -59% -40% -17% 10% 40% 0.50 -91% -76% -46% -2% 54% 1.00 -58% -37% -13% 15% 46% 1.00 -SO% -74% .44% 0% 57% pI O 1.50 2.00 -54% -51% -34% -30% 9% -5% 19% 24% 52% 57% 6 1.50 2.00 -SO% -89% -73% -72% -42% -41% 3% 5% 60% 63% 2.60 .48% -27% -1% 29% 63% 2.50 -89% -71% -39% 8% 66% Sawa Detotieht Bat* Solent Award* &Int Psi - dividend yield sensitivity The call's price sensitivity to dividend yield changes is slightly higher than its rate sensitivity since dividend yield changes only affect the forward and not the discount rate. However, dividend yields do not vary as much as rates: we can see in Figure 7, the SPX implied dividend yield has been between 1.6% and 2.8% historically. Figure 31 and Figure 32 show the simulated P/Ls under different rate and dividend yield change scenarios after one year has passed in he life of the trade, all else equal. Not surprisingly, the dividend yield impact is larger for longer-dated options. Figure 31: Simulated P/L of 36M options after 12M have passed under different dividend yield and spot change scenarios (assumes vols slide down the curve) %Chomp In Spot -10% 6% 0% 5% 10% -0.75 47% -38% -14% 13% 44% 1 -0.50 -58% -40% -17% 10% 41% -025 60% -41% -19% 8% 38% S tri 0.00 0.26 451% 453% -43% -45% -21% -24% 6% 2% 35% 32% 0.50 454% -47% -26% 0% 29% 0.76 68% -49% -28% -3% 26% Figure 32: Simulated P/L of 18M options after 12M have passed under different dividend yield and spot change scenarios (assumes vols slide down the curve) %Chan. In Spot -10% 6% 0% 5% 10% -0.75 -91% -74% .45% -1% 55% .0.50 -91% -75% -46% -2% 54% 0.25 -91% -75% .47% 52% 0.00 -91% -78% .47% .4% 51% 0.25 -91% -78% -48% 4% 50% 0.50 -92% -77% .49% -7% 48% 0.75 -92% -77% 40% -8% 47% Soweto: Detotiele Bat* Sweat Deutirlat Bali* Deutsche Bank Securities Inc. Page 15 EFTA01077912 3 December 2013 US Derivatives Spotlight Relative magnitude of risks We now compare the impact on current SPX call premium from an instantaneous change in spot, implied volatility, rates, and dividend yields. Delta risk remains the prominent driver of P/L. Please note that the parameters have been 'bumped' by different amounts to roughly scale the relative movement of these parameters. For instance a 1% move in spot generally sees a much smaller than 100bp change in 36M fixed-strike volatility. Also, we have bumped the parameters in a parallel fashion across the term structure, even though short-dated vols are more volatile. 'Figure 33: Sensitivity of current premia for different moves in parameters 8% 7% - t • 6% 01 3 5% 2 2% 1% 0% a Spot up 1% SairMiblitSChf trane • IEIM • 36N1 60N1 Vols up 15bps Rates up 10bps DivYtelds Down 5bps Page 16 Deutsche Bank Securities Inc. EFTA01077913 Deutsche Bank Securities Inc. Appendix A: Backtest Results 'Figure 34: Comparing performance under rising and falling markets: Equity vs. various 18M call option strategies Dee-02 to Oct-07 Oet-07 to Mar-09 Mar-99 to Sep-13 Apr-13 to Sep-13 Dae-02 to Sap-13 Dec-02 to Apr-13 Return Vol Return Vol Return Vol Return Vol Return Vol RetNol Return Vol Ret/Vol Equity 13.3% 12.8% -65.3% 37.8% 22.3% 18.7% 18.9% 11.3% 8.0% 20.3% 39.2% 7.5% 20.6% 36.6% Outright: ATM 6.4% 6.8% -24.5% 10.4% 8.8% 9.0% 10.8% 7.7% 3.3% 8.4% 39.0% 3.0% 8.4% 35.4% Outright: 9% 6.5% 6.8% -18.6% 8.1% 7.1% 8.6% 11.9% 8.1% 3.4% 7.8% 43.7% 3.1% 7.8% 39.5% Outright: 5% 4.5% 4.8% -10.8% 4.7% 4.0% 6.0% 9.0% 6.8% 2.3% 5.3% 42.4% 2.0% 5.3% 37.9% Outright: 3% 3.5% 3.5% -8.2% 3.7% 2.4% 4.5% 6.5% 5.7% 1.5% 4.0% 36.8% 1.3% 3.9% 32.6% Spread: ATM -3% 5.0% 3.4% -13.8% 6.7% 6.4% 5.1% 4.5% 2.4% 3.1% 4.7% 64.9% 3.0% 4.8% 62.8% 0 Spread: 9%- 3% 5.1% 3.4% -8.2% 4.3% 4.8% 4.4% 5.6% 2.9% 3.2% 4.0% 79.9% 3.1% 4.0% 76.9% Spread: ATM - 1% 6.0% 5.1% -20.6% 9.2% 8.1% 7.3% 7.9% 4.5% 3.3% 6.8% 49.4% 3.2% 6.9% 46.3% Spread: 9%-1% 6.1% 5.2% -14.8% 6.8% 6.5% 8.7% 9.0% 5.0% 3.5% 6.1% 57.0% 3.3% 6.2% 53.1% Spread: 5%-1% 4.1% 3.1% -7.0% 3.4% 3.4% 4.0% 6.1% 3.5% 2.3% 3.6% 64.9% 2.2% 3.6% 60.8% Spread: ATM -1M 2% 7.7% 6.7% -22.8% 10.4% 7.6% 7.9% -6.4% 7.6% 3.6% 7.8% 45.8% 4.0% 7.8% 50.8% Spread: 9%- 1M 2% 7.9% 6.8% -16.8% 8.1% 6.1% 7.5% -4.9% 8.0% 3.8% 7.3% 52.6% 4.2% 7.2% 57.6% Spread: 5%- 1M 2% 5.9% 5.0% -9.7% 5.0% 3.3% 5.4% -9.4% 7.2% 2.7% 5.2% 52.3% 3.2% 5.1% 62.6% Outright: ATM 6.7% 7.4% -19.4% 9.0% 9.4% 10.0% 13.4% 8.7% 4.4% 8.8% 49.9% 4.0% 8.8% 45.9% Outright: 9% 6.7% 7.4% -14.3% 7.1% 6.9% 9.1% 14.2% 9.2% 4.0% 8.1% 48.8% 3.6% 8.1% 44.2% Outright: 5% 4.3% 5.1% -8.6% 4.9% 3.0% 8.0% 11.8% 7.9% 2.0% 5.5% 37.0% 1.7% 5.4% 30.7% Outright: 3% 3.0% 3.6% -6.2% 3.4% 1.7% 4.4% 9.8% 7.0% 1.2% 3.9% 31.1% 0.9% 3.7% 23.5% Spread: ATM - 3% 5.9% 4.0% -10.8% 5.8% 7.8% 6.3% 4.2% 2.2% 4.5% 5.4% 83.4% 4.5% 5.5% 82.4% Spread: 9% - 3% 5.8% 4.0% -5.9% 3.8% 5.3% 5.2% 5.1% 2.7% 4.1% 4.5% 89.8% 4.0% 4.6% 87.9% el Spread: ATM- 1% 6.8% 5.8% -15.6% 7.5% 8.2% 9.1% -4.9% 8.6% 4.4% 7.6% 58.0% 4.8% 7.5% 63.2% Spread: 9%-1% 6.8% 5.8% -10.5% 5.3% 5.6% 8.0% -3.9% 8.8% 4.0% 6.8% 58.5% 4.3% 6.7% 63.9% Spread: 5%-1% 4.4% 3.5% 4.8% 2.8% 1.8% 5.1% -6.9% 8.4% 2.0% 4.2% 48.7% 2.4% 3.9% 60.8% Spread: ATM -1M 2% 7.9% 7.2% -16.2% 8.3% 7.4% 7.9% -3.3% 7.9% 4.5% 7.7% 58.5% 4.8% 7.7% 62.6% Spread: 9%- 1M 2% 7.9% 7.3% -11.7% 6.8% 5.5% 7.5% -2.4% 8.6% 4.3% 7.3% 58.8% 4.6% 7.3% 62.8% Spread: 5%- 1M 2% 5.6% 5.4% -7.3% 5.3% 2.4% 5.6% -6.3% 8.6% 2.5% 5.5% 46.3% 2.9% 5.3% 54.2% Outright: ATM 7.8% 8.7% -15.9% 7.9% 10.3% 13.7% 10.7% 9.9% 5.7% 11.0% 52.0% 5.5% 11.1% 50.1% Outright: 9% 7.5% 8.5% -11A% 5.9% 7.0% 12.5% 11.8% 10.2% 4.7% 10.1% 46.7% 4.5% 10.1% 44.0% Outright: 5% 4.7% 6.4% -5.8% 3.6% 1.8% 8.3% 8.7% 10.2% 2.1% 7.0% 29.7% 1.8% 6.9% 26.6% Outright: 3% 2.9% 5.0% 4.0% 2.8% 1.3% 6.0% 5.9% 9.9% 1.3% 5.2% 25.5% 1.2% 5.0% 23.3% Spread: ATM -3% 7.1% 4.5% -9.5% 5.3% 9.1% 9.5% 5.2% 1.8% 5.7% 7.2% 79.9% 5.7% 7.3% 78.8% cc Spread: 9%- 3% 6.7% 4.2% -5.3% 3.3% 5.8% 8.1% 6.3% 2.2% 4.7% 6.1% 77.6% 4.7% 6.2% 75.4% Spread: ATM - 1% 8.2% 7.6% -13.3% 6.9% 10.8% 12.4% 12.5% 4.3% 6.4% 9.9% 65.3% 6.2% 10.0% 62.0% Spread: 9%-1% 7.9% 7.3% -8.9% 4.8% 7.4% 11.1% 13.6% 4.7% 5.5% 8.9% 61.1% 5.1% 9.0% 56.7% Spread: 5%-1% 5.1% 5.2% -3.3% 2.4% 2.3% 6.6% 10.7% 4.1% 2.8% 5.6% 50.2% 2.5% 5.7% 44.3% Spread: ATM -1M 2% 8.9% 8.2% -11.0% 6.3% 7.4% 9.6% -5.3% 8.0% 5.6% 8.7% 64.9% 6.1% 8.7% 69.7% Spread: 9%- 1M 2% 8.6% 8.1% -7.9% 5.1% 5.3% 9.2% -4.6% 8.8% 5.0% 8.3% 60.3% 5.4% 8.3% 65.0% Spread: 5%- 1M ri 6.0% 6.4% -3.4% 3.4% 1.5% 7.3% -9.9% 10.5% 2.8% 6.5% 43.3% 3.3% 6.3% 52.6% Source Otutencliet. EFTA01077914 ro Deutsche Bank Securities Inc. c co P a Z Ai ca o 3°- ra 'Figure 35: Comparing performance under rising and falling markets: Equity vs. various 36M call option strategies Dee-02 to Oet-07 Oet-07 to Mar-08 Mer-03 to Sep-13 Apr-13 to Sep-13 Dee-02 to Sep-13 Return Vol Return Vol Return Vol Return Vol Return Vol Ret/Vol Dee-02 to Apr-19 Return Vol Ret/Vol Equity 13.3% 12.8% -55.3% 37.8% 22.3% 18.7% 18.9% 11.3% 8.0% 20.3% 39.2% 7.5% 20.6% 36.6% < at r, -. h., a Outright: ATM 7.3% 9.0% -23.0% 12.3% 8.9% 10.1% 13.5% 7.9% 3.9% 10.0% 39.5% 3.6% 10.1% 35.5% U) ti Outright: 18% 8.1% 11.4% -22.2% 12.2% 8.7% 10.6% 15.0% 9.1% 4.3% 11.2% 38.3% 3.9% 11.2% 34.3% 3 Outright: 10% 5.8% 8.6% -12.3% 7.4% 4.5% 7.1% 12.1% 7.6% 2.8% 7.9% 35.8% 2.5% 7.9% 31.1% E R. Outright: 6% 4.2% 6.7% -6.8% 5.0% 2.2% 4.7% 9.4% 6.2% 1.9% 5.7% 33.0% 1.6% 5.7% 27.9% Spread: ATM -6% 5.2% 4.9% -13.0% 7.7% 6.8% 5.9% 4.5% 2.0% 3.4% 5.8% 59.8% 3.4% 5.9% 58.1% cc Spread: 18% - 8% 6.0% 6.2% -12.3% 7.5% 6.6% 6.2% 6.3% 3.4% 3.8% 6.4% 59.4% 3.7% 6.5% 57.1% Spread: ATM - 2% 7.0% 6.8% -19.5% 10.8% 8.8% 8.8% 10.1% 5.2% 4.2% 8.3% 51.0% 4.0% 8.4% 47.7% Spread: 18% -2% 7.7% 9.3% -18.8% 10.7% 8.6% 9.2% 11.7% 6.6% 4.6% 9.5% 48.1% 4.3% 9.6% 44.7% Spread: 10% - 2% 5.4% 6.0% -9.0% 5.7% 4.4% 5.6% 8.7% 4.9% 3.1% 5.8% 53.1% 2.9% 5.9% 49.1% Spread: ATM - 1M 2% 8.1% 8.4% -21.0% 11.9% 8.4% 9.3% -3.1% 7.1% 4.4% 9.3% 46.9% 4.7% 9.4% 49.6% Spread: 18% - 1M 2% 8.8% 10.7% -20.2% 11.8% 8.3% 9.7% -1.3% 8.2% 4.7% 10.5% 44.9% 4.9% 10.6% 46.8% Spread: 10% - 1M 2% 6.6% 8.2% -10.4% 7.0% 4.0% 6.3% -4.6% 6.8% 3.2% 7.3% 44.3% 3.5% 7.3% 48.4% Outright: ATM 8.3% 10.4% -22.0% 11.7% 10.3% 11.4% 13.5% 7.9% 5.1% 11.0% 46.2% 4.8% 11.1% 42.8% Outright: 18% 8.8% 10.9% -23.5% 12.7% 9.8% 11.5% 15.0% 9.1% 4.9% 11.4% 43.1% 4.5% 11.5% 39.4% Outright: 10% 6.5% 8.5% -13.3% 7.8% 5.0% 7.5% 12.1% 7.6% 3.2% 8.0% 40.4% 2.9% 8.0% 36.0% Outright: 6% 4.7% 6.1% -7.6% 5.2% 2.3% 4.7% 9.4% 6.2% 2.0% 5.4% 37.2% 1.7% 5.4% 32.0% Spread: ATM -6% 5.8% 5.0% -11.3% 6.7% 8.1% 7.5% 4.5% 2.0% 4.5% 6.4% 70.1% 4.5% 6.5% 69.0% 0 cc Spread: 18% - 6% 6.3% 5.5% -12.6% 7.7% 7.7% 7.2% 6.3% 3.4% 4.4% 6.6% 66.2% 4.3% 6.7% 64.2% Spread: ATM - 2% 7.9% 8.6% -18.1% 9.8% 10.1% 10.3% 10.1% 5.2% 5.3% 9.5% 55.8% 5.1% 9.7% 53.2% Spread: 18% - 2% 8.3% 9.1% -19.5% 10.9% 9.6% 10.3% 11.7% 6.6% 5.2% 9.9% 52.4% 4.9% 10.0% 49.2% Spread: 10% - 2% 6.1% 6.6% -9.5% 5.8% 4.9% 6.2% 8.7% 4.9% 3.5% 6.3% 54.8% 33% 6.4% 51.2% Spread: ATM - 1M 2% 9.1% 9.6% -20.1% 11.3% 9.8% 10.5% -3.1% 7.1% 5.5% 10.2% 53.6% 5.8% 10.3% 56.3% Spread: 18% - 1M 2% 9.5% 10.1% -21.5% 12.3% 9.4% 10.5% -1.3% 8.2% 5.3% 10.6% 50.4% 5.6% 10.7% 52.5% Spread: 10% - 1M 2% 7.3% 7.7% -11.5% 7.4% 4.7% 6.7% -4.6% 6.8% 3.7% 7.3% 50.6% 4.0% 7.3% 54.9% Outright: ATM 8.7% 11.4% -26.5% 14.0% 11.3% 15.7% 18.3% 10.8% 5.1% 13.7% 36.9% 4.6% 13.8% 32.9% Outright: 18% 9.0% 11.7% -28.6% 15.6% 9.8% 14.9% 17.8% 11.0% 4.3% 13.7% 31.6% 3.8% 13.8% 27.6% Outright: 10% 6.5% 9.6% -16.7% 9.5% 3.4% 9.9% 15.3% 9.7% 2.1% 9.7% 21.5% 1.6% 9.7% 16.2% Outright: 6% 4.1% 7.0% -9.9% 6.5% 2.1% 4.8% 12.1% 8.1% 1.4% 6.1% 22.8% 1.0% 6.0% 16.1% Spread: ATM -6% 6.8% 5.4% -13.5% 8.5% 9.2% 12.4% 7.8% 3.7% 5.1% 9.4% 54.8% 5.0% 9.5% 52.9% 0 cc Spread: 18% -6% 7.2% 5.7% -15.5% 10.4% 7.9% 11.6% 7.4% 4.0% 4.5% 9.3% 48.3% 4.4% 94% 46.3% 2 Spread: ATM -2% 8.4% 9.8% -21.9% 12.0% 10.9% 15.0% 15.2% 8.0% 5.4% 12.5% 43.3% 5.1% 12.7% 39.8% Spread: 18% - 2% 8.8% 10.0% -23.9% 13.8% 9.4% 14.2% 14.8% 8.3% 4.7% 12.5% 37.8% 4.3% 12.6% 34.2% Spread: 10% - 2% 6.3% 8.0% -12.1% 7.3% 3.1% 9.2% 12.0% 6.8% 2.5% 8.4% 29.5% 2.1% 8.5% 24.9% Spread: ATM - 1M 2% 9.4% 10.5% -24.3% 13.5% 10.8% 14.4% 0.6% 9.9% 5.5% 12.7% 43.5% 5.7% 12.8% 44.7% Spread: 18% - 1M 2% 9.7% 10.7% -26.2% 15.0% 9.4% 13.6% 0.3% 10.1% 4.8% 12.6% 38.2% 5.0% 12.7% 39.3% Spread: 10% - 1M 2% 7.3% 8.7% -14.6% 9.1% 3.1% 8.6% -3.4% 8.9% 2.6% 8.7% 29.9% 2.9% 8.7% 32.7% Sala Aunt)* an EFTA01077915 3 December 2013 US Derivatives Spotlight Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Salil Aggarwal Hypothetical Disclaimer Backtested, hypothetical or simulated performance results have inherent limitations. Unlike an actual performance record based on trading actual client portfolios, simulated results are achieved by means of the retroactive application of a backtested model itself designed with the benefit of hindsight. Taking into account historical events the backtesting of performance also differs from actual account performance because an actual investment strategy may be adjusted any time, for any reason, including a response to material, economic or market factors. The backtested performance includes hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid. No representation is made that any trading strategy or account will or is likely to achieve profits or losses similar to those shown. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor guarantee of future returns. Actual results will vary, perhaps materially, from the analysis. Deutsche Bank Securities Inc. Page 19 EFTA01077916 3 December 2013 US Derivatives Spotlight Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at under the 3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for 'wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's-, "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or 'Nippon' is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Page 20 Deutsche Bank Securities Inc. EFTA01077917 David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee Guy Ashton Global Chief Operating Officer Research Marcel Cassard Global Head FICC Research & Global Macro Economics Richard Smith and Steve Pollard Co-Global Heads Equity Research Michael Spencer Regional Head Asia Pacific Research International Locations Ralf Hoffmann Regional Head Deutsche Bank Research, Germany Andreas Neubauer Regional Head Equity Research, Germany Steve Pollard Regional Head Americas Research Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Groats Gallusstralle 10-14 Filiale Hongkong 2-11-1 Nagatacho Level 16 60272 Frankfurt am Main International Commerce Centre, Senn Park Tower Corner of Hunter & Phillip Streets Germany 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Tel: (49) 69 910 00 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (811 3 5156 6770 Tel: (61) 2 8258 1234 Deutsche Bank AG London Deutsche Bank Securities Inc 1 Great Winchester Street 60 Wall Street London EC2N 2EO New York, NY 10005 United Kingdom United States of America Tel: (44) 20 7545 8000 Tel: (II 212 250 2500 Global Disclaimer The maernanon and opinions inthermal wee ;reweave Daum/ Berk AG a one ol es &Mates leelleavely -Wreathe Bonn me innonman noon .9 kg weal to be mien* OM Ma [...neatened nomgoblin ~nee televel to be rehab* Deutsche Berk makee no reprceentenon as to the mosey, a owitenentes of soon reconalon Deutsche Berk may engage in extern's Pentane.% on a mcprotane tope or otherwise. m e mercer imoneneent vain V* mew taken m to women meat kl eficen. olnen wan DAM** Bank mamma sirettgists end eolee stale. may tam a view that n monument wan Mai team m this research neon Deutsche Bent maybe en owe'. aeaer. manager.dmnbutcra aOwnistraeor et or prowSeother servicesSo.an ETC a-KKK/tenth° report tor when 4 moues POMP000,000 Cipn0ins. 'Inmates end P.:40.710, 3 In INS 14:0, 1 contention* current IWpene (of eta outlier el of the <IMe ot Wa ,flat. They Oo net necoosply rota In* pen motel Demo* Bet and ere subplot to change without nonce. Denson* Bent has ro oblqebon 10 orlon mo(My a emend this report ale Meerwes nobly a rectneM Pinot in the event Mal pry option. Rome a estimMe all lath Immo. onion or soostqatoov axons romans,* Prices and averleblllycl leoneal instruments are soneci to chimp) wievot ant The report proofed lot stannanonal Disposes oily It irk not en ober a e conotobon ot tri onto to buy a odl Try harcis msliumens or to panccete M any Awboie tracing strolegy large paces are rovreody .incivose end a produCt el the ingot )Iclgemem Ape neukol Devisee Bona's Minh 20I0econeteso 01 intratnk AG. a security maybe covered by mete thtniOnSenehil Melon the Dengsol* gent grow Each 01thWCenmtW5 may um enema nvotoomogeo Sanaa the securer as a result Ins ncornmendotrem may ddter end Inc gime legMe and ellintROM Olen may An A.4181 in Awing 20*. Daybed,. sent minuted a new octave whereto, &Nitwit may creme rot to set a mor4pn a target pme 0, cent, issuers um.. COVeape web 0 IICOS mono Perlicutro. toe win towage coos lot 'NOW Nod 0100.0 Awn; a nwtet cap owner ten Teel other companies in t vector a region. We behove that such Wow MI slow tn, 10 mete bent 0$0 DI our AMMO,. Pb000 e41 OW webs.* al CIGI0fMn0 IN IMO] pace ol any Pock The Hernial int/aliments discussed in me neon mgr not be palpable SI inmate" and imeteare riwee make tee own movw4 ewestrnent Oceans. Stock If0n4OCOONS con lead le hoses es a result 00 pace Itchier:as ON Otter (WO.) II 0 Ir4n441410INM0414 denomnoted me MEW% Who, ton on inwelots currercy. a change handle-go Nen may eclvenest 000011hOinWtilM0,4 pncee we tote Clireng el to and of eta PrOVKnIS hydro sespon unites °minim indicated Pnces em co-son from loos totoonacti me RNAC.0.1100Mil40 ale 0410, vonaoto Date it, woad loom Densone Belk erg SUMO commence. Past geraernance es not n0,0104nlY moony, of *num tomato Dein** Bent may web 'toped mimeos cowed by the retort. sell 10 a boy from CUS.rnefS on 0 primp.. 0004. end ((AWN/ 11,4 •00:01 n 000ding 100000 one PlOP,ISSer 0014. Denweve ireneecoso inwske materous nits inceadrog. Omen OthOrS. market, couriteporty default and itichickly nst The appropmetasso or otherwise el These products lot use by investors irk dependent on In* inmolarte own coosnstances incleirq teen la. POPOOn. 040 moose,' ...Penman end eta mime 00 tea one. assets ON lads., end es such wanton, shoukl take own lewd end hneral "Ina before antenna into eny INMOCIK. Wilk, Si of moored be the cements ol mot guar-mon boar. nopan moos too ends .1010014010 lot 411 aVOSI010 Poor to [whoa mein an °pion Imentme must renew toe 'Clwacteneics and Risks 0 Sionottozea nom.' et III1/00 0,0 it001,10 000010 11,09/00Sil0 please cootea MOW+, BA* AG et .1 0121 260.7914. for a copy the nvonem doonnt The nsk 01 lose in !Mune Pedro and one. swoon ca oomosoc. on be out otonum ns o mat o/ ine Wider. ol towage obternable n Muresend cptesoe Paden. bases maybe inosred tn t ere wester Intr. Po amount el Vitt Minnie *POMO Udine goverreng Tilt PI0V4I0S 0114e4.40. 011 trie4KIIOnSOMnIk/ be. teit4VI00 enough the Deoexto Birk entity in pm neesior'e name nensdKison In the U.S mos noon Is extned entire detained OV 0041100 Boat Seminoles Inc. a wit~ el tee NYSE. 0'4, NASD. NFA end WC. In Germane the repart ie append archai communKated by Deutsche Beat AG iteration ottmontos by Int. Bern h the wines Kingdom to NsXel .0,00.0,0104:P0, COMMtifiK01010V Deutsche Bent AG London. a member al the 1.0410nS0Xt E•Khanr. end 10:0/0100 OV the Froncel Cora/co *arca/ lot theconduct ol neentrnem Wove, in the UK end ennonted Wane Bu/m. The report n <Sambaed in Map Keg OV thane* Beat AG. Hong Kong °ninth in Kato by DeMsche Scam*, Korea Co This rccon is disellanted nSpepore by DeAscee Belk AG. Sroopore Branch Of MAAS.* Sewn*, Aso Umeecl. grower* Branch (Om RelateChew 018-00 South Tower Smpagore COM. 016 6423 Ktan. ono Nevem. in Singapore el the repel ere ea contact Deutsche Bent AG. Sapper* Biondi or Deutsche Scones AM Limited Sroapore Birch rif41Pett d eny matters enong loom. or In C0000:000 wee me 14P” MOM this 10004 n nsueda prornalgeed in Singaporeea a person who n met an ocaelied imestai, even fn**S<Of 0, immanent. meteor be defined in the WACO* Singapore lows end regutalKote. Deutsche Bent AG. Singapore Branch a DeAscee Smut.. ASI0 °MIS. Stroogote Baron occettin *got ret000tttoun to such person tor tee contemn el POMP, In JlIPM, Inn Noon is Demme. endeor delnboted be Devteche Sewn*, Inc The staimMion cotarned in tee nun Owe not contemn, the mimeo° ol inweimem edece. In Amoral. noel clogs enskid obton a copy of a noducl Ctcloeuns Statement IPM) relsON to Pry leeneal product referred to n this repel rid console. to P05 Wore mabng eny demon smut woodier 10 ocooto me &motto Deutsche Dena AG Joeonnesborg n imamate:1in the Feder* Kongo of Como", (Bronco Roomer numxt is South Mau 19980M98010l Ackbponal stannanon relMwe to "Nunn. Mew hharcul products or issue" damned in Inn won is mown* upon reomu ins moon may mot be reproOdcmt 0411,04I*0 a publohed by eny paean Sr say popmevolhovi Deutsche Bark's pine Vint*. coaled. PkOSO0te mace WPM owing Coovtont 2013 Deutsch, Woo AG EFTA01077918