From: Daniel Sabba

From: Daniel Sabba To: "Jeffrey E." <[email protected]> CC: Paul Morris , Stewart Oldfield , Valle Stepanian , "Arian Dwyer" Richard Kahn Subject: RE: Idea for US equity hedging... [C] Date: Tue, 09 Jun 2015 15:05:48 +0000 lane-Images: image00I.jpg Classification: Confidential Most investors are familiar with the usual negative correlation between bonds and equities, often relying in bond/equity portfolio allocations as a hedge. They believe their portfolios to be protected because they have observed equities sell- offs being followed by bond rallies and vice versa. We wanted to follow-up on the hedges below in light of the recent price action. Last week we observed two trading days with sell-offs in both bonds and equities in the US. We think this is scenario worth noting given (i) the upcoming Fed lift- off, (ii) the potential reversal of a secular bull market in bonds, which started in the 1980ies, (iii) elevated equity valuations, a potential result of monetary policy stimulus. With the hedge below, an investor can get up to 5x their premium in the event of a shallow sell-off in both equities and bonds. Happy to discuss in further details. From: Daniel Sabba Sent: Wednesday, June 03, 2015 9:43 AM To: 'Jeffrey E.' Cc: Paul Morris; Stewart Oldfield; Vahe Stepanian; Arlene Dwyer; 'Richard Kahn' Subject: Idea for US equity hedging... [C] Classification: Confidential Jeffrey, We wanted to share this US equity hedging idea with you. We think it is relevant since US equity indices are near historic highs, implied volatility in US equities is close to historical lows and there is potential for Fed liftoff in September. David Bianco published the following on 5/22 (full report attached) about the possibility of a 5%+ pullback in the summer months: "We believe the probability of a 5%+ dip is high this summer and our tactical call remains Down given the S&P now at an even higher PE than a year ago, heightened uncertainty in 10yr yields, weak earnings growth and continued soft economic data. We haven't had a 5%+ dip this year. Historically 5%* dips are common and happen at least once a year since 1960, except 1964, 1993 & 1995. It has been 916 trading days (3.6 years) since a 10% correction. Selloff triggers could be a further rise in 10yr yields especially if UE keeps falling amidst slow economic growth and Fed remains unclear on first hike timing, or a jump in the dollar upon the Fed expressing firm intentions to hike in Sept." With that said, we looked at OTC equity put spreads contingent on higher rates. We priced in-the-money versions which would obtain its maximum payout (over 5x premium) with a 5% sell-off in SPX and higher l0y US swap rates (CMS, 25bps over its forward level). EFTA01193030 Indicative transaction terms (as of 06/03/2015): Client buys: OTC SPX 105%/95% Put Spread contingent on 10y USD CMS > atmf+25bps at expiry Notional: USDS0mm Expiry: 18 Dec 2015 Offer (mid): 2.00% (1.60%) Ref vanilla: 4.30% Ref SPX future: 2115 Ref 10y fwd: 2.54% SPX Implied volatility levels close to historical lows GRAB O O 99 Actions • 98 Templates 911 Hide Daily 02-Dec-2010 Spread(Absolute) 02-3un-2015 SPX Index SPX Index Spread(Absolute) 260 army !XL r Volatility Comparison-1 • (1.) 6M 105% Mny 12.104 • (2.) 6M 95% tiny 16.839 , w. 1 7 OD OD ► 35 • 30 0- 2S 0.20 '15 *10 Spread(Abs) : Mny -4.735 Low: 2011 2012 I 2013 I 2014 I 2015 Australia 61 2 9777 8600 Brazil 3511 2395 9000 Europe 44 20 7330 7500 Carrang 49 69 9204 1210 Hong Kong 852 2977 6000 Japan 81 3 3201 8900 Simmers6562121000 U.S. 1 212 318 2000 Copyright 2015 Bloomberg Fanonce L P SN 793879 C919-4363-2 02-Jun-15 10 11 26 EDT GMT-4 00 h -4.00 Please let us know if you would like to discuss. Best regards, Daniel Daniel Sabba Key Client Partners nc. Email All trade execution information contained herein is being provided as an accommodation at your request in advance of your receipt of the official trade confirmation(s). Additional trade detail information available upon request. The terms of the trade(s) may be subject to change prior to settlement, and therefore the official trade confirmation(s) and account statements issued by Deutsche Bank shall govern. Deutsche Bank is not responsible for any discrepancy between the informal execution report and the official trade confirmation(s) or account statements. EFTA01193031 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. EFTA01193032