EFTA Document EFTA01400683

Subject: Fw: Higher rates in Europe - timely [C] From: Paul Morris ‹ > Date: Wed, 29 Apr 2015 13:48:33 -0400 To: Stewart Oldfield ‹ > Classification: Confidential From: Daniel Sabba Sent: Wednesday, April 29, 2015 08:56 AM To: jeffrey E. <[email protected]> Cc: Paul Morris; Vahe Stepanian; Ariane Dwyer; Richard Kahn Subject: Higher rates in Europe - timely [C] Classification: Confidential This is timely given this morning's moves... EUR swap rates are up dramatically and markets are fluid - the pricing below is as of last night's close. Trade Rationale: Yields in the Eurozone have fallen since the start of 2014, and the commencement of the ECB's 1.1 trillion EUR quantitative easing program in March has fueled the decline to a greater degree than anticipated This drop is highlighted in Chart 1, which shows the historical performance of the 10yr and 30 yr EUR Swap rate and 10y and 30y German bund yields. The chart also shows the 5 and 15 year average yield for the 30y EUR Swap rate Investors are now questioning if these unprecedented lows are sustainable and how they can position themselves for a rise in European rates To articulate this view, investors can purchase CMS caps on the 30yr EUR swap rate that provides a linear payout on the 30yr EUR Swap rate if it rises above the strike. In this trade, even a small retracement to the historical norm provides a meaningful payout A retracement to 5y historical averages would yield a payout of -6x on ly 1% strike caps, while a retracement to 15y historical average would yield a payout of -12x. In the below table we have included indicative pricing (as of 4/28 close) for 1 and 2yr expiries, and 1.00%, 1.25% and 1.50% strikes. In addition, for the ly CMS cap struck at 1.00%, we have included a terminal EFTA01400683 payout diagram and a chart showing the strike and breakeven level on the 30yr EUR Swap 1 year chart (Chart 2) Chart 1 (time series of European rates) fcid:[email protected] Indicative Transaction Terms: Client buys: Expiry Terminal Payout: Currency EUR EUR EUR EUR EUR EUR Strike 1.00% 1.00% 1.25% 1.25% 1.50% 1.50% CMS Cap on 30y EUR CMS rate, Single Look at Notional * max (Terminal CMS rate — strike, 0) Expiry EFTA01400684 ly 2y ly 2y ly 2y Tail 30y 30y 30y 30y 30y 30y ATMF 0.94% 1.07% 0.94% 1.07% 0.94% 1.07% Offer (mid) bps 26 (23) 46 (40) 16 (14) EFTA01400685 34 (30) 10 (8) 25 (21) Break Even 1.26% 1.46% 1.41% 1.59% 1.60% 1.75% Terminal Payout Chart for 1% strike CMS Caps on 30y {cid:[email protected]} Chart 2 (EUR 30y swap rates and breakeven for the ly CMS cap struck at 1.00%,) {cid:[email protected]} Please note these transaction terms are indicative. Regards, Daniel Daniel Sabba Key Client Partners EFTA01400686 Deutsche Bank Securities Inc. Tel. Mobile Email EFTA01400687