From: Paul Morris <1

From: Paul Morris <1 To: [email protected] Subject: Re: Depressed options volatility makes 'Renmimbi weaker' hedges very cheap I KCP Capital Markets [C] Date: The, 28 Jan 2014 18:02:52 +0000 Inline-Images: unnamed; unnamed(1); unnamed(2); unnamed(3); unnamed(4); unnamed(5); unnamed(6); unnamed(7) Classification: Confidential Classification: For internal use only don't be, these are very complicated situations and you have good intel and instincts, will stay focused on the trades Paul Morris Managing Director Deutsche Bank Private Bank 345 Park Avenue, 27th Floor New York. NY 10154 Office: Cell: From: Jeffrey Epstein <[email protected]> To: Tazia Smithfdbfdbcom@DBAMERICAS. Paul Morrisldbldbcom@DBAMERICAS. Dale: 01/28/2014 12:28 PM Subject: Re: Depressed options volatility makes Renmimbi weakee hedges very cheap I KCP Capital Markets (I) sorry, questions about what do you think about china , are silly,,,,,,,,, lets pick a trade , have some back up and move. I am a trader / investor not as atrologist On Tue, Jan 28, 2014 at 12:24 PM, Tazia Smith > wrote: Classification: For internal use only Jeffrey - Curious for your view on China. We're concerned about the defense of China's stability (even by our own Global Markets Research analyst, Jun Ma). China may be re-rating for longer-term stability as an 'emerged' market, but that our DB GEM Equity Strategist, Jean-Paul Smith, and his team may have the downside risk right in the nearer-term. Bulls point to estimates that the AUM in the trust sector only totalling Rmb 10.1 trillion (arguably too low), and that 93% of AuM in trust products could be "backed" (38% by central government, 34% by local governments, and 21% by large financial groups ). But Bears highlight that (a) bailouts by authorities won't be a sustainable solution to increasingly regular defaults, (b) they suggest the inherent moral hazard problem that will perpetuate high-risk borrowers leveraging the shadow banking system (vs. the proposed quotad bond market issuance and bank securitization channels that the government intends to promote to increase transparency and liquidity), and, (c) bears also point out EFTA01154896 that local authorities, supposedly on hand to intervene in troubled loans, are themselves highly indebted (currently account for the highest proportion of credit in China, and news flow of local government/ LGFV debt rollovers is becoming all too common - according to DB GEM Equity Strategists, 1/28/14). As Nav points out below, there is a crowded long China trade with leverage, financed by selling options. Calls on USDCNH present a convex payoff caused by investors selling too many options - timeframe on a move is uncertain which is why he picked 1y (2y options are not very liquid). Please see below, let us know your thoughts. Best Regards, Tazia -- Forwarded by Taxi') Smith.rdb,rdbcom on 01,28,2014 11:58 AM.--- From: Nav Guptaidbldbcom@DBEMEA To: Dale: 01/28/2014 09:44 AM Subject: Depressed options volalildy makes Renmimbi weaker' hedges very cheap KCP Capital Markets (I) USDCNH call options underprice the possibility of higher USDCNH. This could result from unwinding of heavy positioning long CNH vs USD resulting from credit tapering, investor awareness of worsening bank asset quality and declining growth. The correlation between China and other EM is presently low. Sustained outflows from broader EM will likely impact China also 1) Buy a 1y expiry, 6.2 / 6.7 strike USDCNH call spread. Premium (offer) -0.43% of USD notional. Spot breakeven 6.226 2) Buy a 1y expiry, 6.3 / 6.8 strike USDCNH call spread. Premium (offer) -0.30% of USD notional. Spot breakeven 6.318 USDCNH spot = 6.029, 1y ATMF = 6.093 Indicative levels only, subject to market movement. Source: DB KCP London. I,21k14. These premiums are very low compared to the potential returns if USDCNH turns higher. Implied vol is approx. 3% The complacency and positioning among FX and FX options participants in USDCNH is high • USDCNH EFTA01154897 6.8000 6.7000 6.6000 6.5000 6.4000 6.3000 6.2000 6.1000 2010 2011 2012 2013 20 ..s.XNH Curacy (USD-CNH Cross Rate) Daily OIJAN2009-22JAN2014 Ccpyrightle 2014 Bloomberg Finance LP. 22-Jan-2014 17:09:40 Used with permission of Bloomberg Finance LP • PBoC has significantly tightened money market rates to curb shadow banking and asset speculation Shanghai interbank offered rate fixing - 1 month 10.0000 8.0000 7.3330 6.0000 4.0000 2.0000 2009 2010 2011 2012 2013 20 SHIF1M Index (Shanghai Interbank Offered Rate Fixing - 1 Month) Daily 29JAN2009 Copyright? 2014 Bloomberg Finance . 28-Jan-2014 17:58:51 Used with point,ion BloomberF Financt LP • The recent headlines on bad loans in China's shadow banking industry have raised concerns of a systemic event China's trust industry has relatively high risk shadow banking products given the liquidity risks. These products have seen rapid growth since 2010, reaching Rmb10.1 to as of 3Q13 with a 2010- 3Q13 CAGR of 55%. EFTA01154898 Trust assets grew rapidly in China, reaching Rmb10.1 to by 3Q13 2010-3O13 CAGR at 55% 2A 0,0 CAGft I ea a W( ay C 4.3 341 3.7 COS Ste 61 In terms of underlying investments, 29% of trust assets are invested in higher risk industrial and commercial sectors (as of 3Q13) 06) 10.1 100 .2 ar 7 4010 4011 1012 20l2 7012 4012 1013 2013 3013 • Ante ntenfrgetrient taw Single vat uust • ONnterted unt trubt Sant Owe rots; Ass:canon 90 50 70 60 60 2 I 40 la 30 0 10 0 17 21 as is is Is 17 14 13 10 20 22 24 21 ze 6 13 14 12 II 10 a I1 11 4010 4011 1012 2012 3012 4012 1013 2013 3013 Other hods but Industrial and ceramerclal financial institutions • Security market n Real estate • Infrastructure Note: A sat management trusts are not in luded in the above. SO.400: Cone Trust Assooatton Asian corporates have sold a significant quantity of options (to enhance returns) depressing implied volatility IF USDCNH starts to retrace higher, option sellers will short cover options they have 6.0000 5.0000 4.0000 3.0000 o 2.0000 2011 2012 2013 20: C.I•rcy Opl:Vol. ATV .v) Daily 293AN2C09-263AN2014 Copyrighlt 2014 Bloomberg Finance 28-1311-2014 18:01:27 Used with permission of Bloombem Finance LP KCP Capital Markets Vinit Sahni I Nav Gupta I Vanshree Verma Nav Gupta Managing Director Deutsche Bank AG. Filiale London Deutsche Asset & Wealth Management 105/ inners Hall). EC2N 1EN London, United Kingdom Tel. Mobile Email EFTA01154899 My proposed ideas are being delivered to you by the DeAWM Key Client Partners ("KCP') London desk for discussion purposes only, and do not create any legally binding obligation on the part of Deutsche Bank AG and / or its affiliates ("DB1. These ideas are for the consideration of the intended recipients of this mail only. The KCP London desk does not provide investment advice. All intended recipients are Professional investors (as defined by MiFID). who understand the strategy, characteristics and risks associated with any ideas proposed herein and will be able to evaluate it independently. All trades on proposed ideas shall be subject to the relevant internal approvals prior to execution. This e-mail may contain confidential and/or privileged information. If you are not the intended recipient (or have received this e-mail in error) please notify the sender immediately and delete this e-mail. Any unauthorized copying, disclosure or distribution of the material in this e-mail is strictly forbidden. Please refer to for additional EU corporate and regulatory disclosures. Tazia Smith Director I Key Client Partners - US Deutsche Bank Securities Inc Deutsche Asset 8 Wealth Management 345 Park Avenue, 26th Floor New York. NY 10154 Tel. Fax Mobile Email f-kkg-ift, Porforent This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. The information contained in this communication is confidential, may be attorney-client privileged, may constitute inside information, and is intended only for the use of the addressee. It is the property of Jeffrey Epstein EFTA01154900 Unauthorized use, disclosure or copying of this communication or any part thereof is strictly prohibited and may be unlawful. If you have received this communication in error, please notify us immediately by return e-mail or by e-mail to [email protected], and destroy this communication and all copies thereof, including all attachments. copyright -all rights reserved This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01154901