EFTA Document EFTA01416150

Subject: RE: DB FX trade idea: EURZAR-USDZAR correlation swap From: Xavier Avila ‹ > Date: Wed, 06 Dec 2017 13:15:15 -0500 To: "Paul Barrett ( Cc: Stewart Oldfield Joshua Shoshan Martin Zeman Paul, we tried to call you on the corr swap. We spoke to trading and our bid-offer prices are below, a bit better than we were discussing in both currencies on the bid side. I also attach the t/s in ZAR ready to go just in case you want to review. Let's discuss when you have a sec. Thanks. ly USDZAR-EURZAR Corrswap in USD Payout — two-way is 82.5 / 88.5 ly USDMXN-EURMXN Corrswap in USD Payout — two-way is 78 / 83.5 From: Xavier Avila Sent: Tuesday, December 05, 2017 4:17 PM To: 'Paul Barrett Cc: Stewart Oldfield ; Martin Zeman Joshua Shoshan Subject: RE: DB FX trade idea: EURZAR-USDZAR correlation swap Paul, file attached to look at calculations of implied and realized. Thanks From: Xavier Avila Sent: Tuesday, December 05, 2017 11:17 AM To: 'Paul Barrett ( Cc: Stewart Oldfield ; Joshua Shoshan < M>; Martin Zeman Subject: RE: DB FX trade idea: EURZAR-USDZAR correlation swap EFTA01416150 From: Xavier Avila Sent: Friday, December 01, 2017 5:55 PM To: 'Paul Barrett Cc: Stewart Oldfield ; Martin Zeman Subject: RE: DB FX trade idea: EURZAR-USDZAR ; Joshua Shoshan correlation swap Paul, see below the note and analysis that Vimal put together. Attached also an indicative termsheet, where you can also see the mathematical Definition of Realized Correlation. Thanks and good weekend. Xavi Following the call yesterday we have attached an example termsheet for a correlation swap. We have also looked at 2 historical periods where USDZAR-EURZAR correlation realized at significantly lower levels, during 2010-2011 and 2015. Overlaying the realized correlation during those periods with USDZAR, EURZAR and EURUSD FX spot rates (each rebased to 1), we can see that lower realized correlation is driven by significant trends and moves in EURUSD particularly relative to ZAR. This coincided with EURUSD realized volatility rising relative to ZAR realized volatility. In other words EURUSD spot became bigger driver compared to ZAR spot. fcid:[email protected] {cid:[email protected]} fcid:[email protected] {cid:[email protected]} EFTA01416151 From: Xavier Avila Sent: Friday, December 01, 2017 3:54 PM To: 'Paul Barrett Cc: Stewart Oldfield ; Martin Zeman Subject: RE: DB FX trade idea: EURZAR-USDZAR ; Joshua Shoshan correlation swap Paul, Vimal is working on the analysis and we'll send soon with the termsheet and mathematical claculations of implied and reaslied correlation. See also below the same idea but in EURMXN-USDMXN, the strike is a bit lower but Vimal wanted to point out that the historical realized has gone also much lower than in the ZAR situation, so the potential for positive payout seems higher here than in ZAR. Vimal also told me that we have seen clients do more the MXN and TRY crosses than the ZAR one, but typically MXN and TRY are currencies with more interest. Talk soon. Thanks Trade Idea Sell ly EURMXN-USDMXN correlation swap at 77% Sell 2y EURMXN-USDMXN correlation swap at 77% Rationale EURMXN-USDMXN implied correlations are close to the highest levels since 2007 (see graph 1) This has been driven by MXN implied volatilities trading at their highest levels relative to EURUSD volatility since the financial crisis, largely a result of concerns regarding the Mexico elections in 2018 (see EFTA01416152 graph 2) Since 2007 the highest ly realized correlation is 87% and the lowest is 11%. For 2y the highest is 83% and the lowest is 44%. Whilst current levels of ly and 2y realized correlations are close to their highest levels, 3m realized correlation has fallen from recent highs to now sit close to current strikes (see graphs 3 & 4) The correlation swap provides a limited loss way of fading elevated MXN volatilities and buying cheap EURUSD volatility, which could perform in the event of rising Italian election and Catalonia independence concerns Graphs Graph 1: EURMXN-USDMXN implied correlation at highs Graph 2: MXN vols elevated compared to EURUSD vols Graph 3: ly realized correlation vs. strike Graph 4: 2y realized correlation vs. strike EFTA01416153 Sources: Deutsche Bank, Bloomberg Finance L.P. Disclaimer: http://globalmarkets.db.com/new/content/3045.html From: Martin Zeman Sent: Tuesday, November 28, 2017 12:42 PM To: Paul Barrett Cc: Stewart Oldfield Osullivan < Subject: DB FX trade idea: EURZAR-USDZAR correlation swap ; Xavier Avila ; Joshua Shoshan ; Liam Paul, this could be an interesting trade on ZAR without really getting directional exposure to it. The payout is defined as a $amount per point of correlation. So that means selling the correlation at 80% for $10k per point of correlation is a max loss of $200k. Let me know if you'd like to discuss. Martin EFTA01416154 Trade Idea Sell 6m EURZAR-USDZAR correlation swap at 80% (USD payout) Sell ly EURZAR-USDZAR correlation swap at 80.5% (USD payout) Rationale EURZAR-USDZAR implied correlations are close to the highest levels since 2007 (see graph 1) This has been driven by ZAR implied volatilities trading at their highest levels relative to EURUSD volatility since the financial crisis (see graph 2) Since 2007 the highest 6m realized correlation is 94% and the lowest is 41%. For ly the highest is 93% and the lowest is 48%. Looking at shorter dated metrics, 3m realized correlation has fallen from recent highs to now sit close to current strikes (see graphs 3 & 4) The correlation swap provides a limited loss way of fading elevated ZAR volatilities and buying cheap EURUSD volatility, which could perform in the event of any Eurozone concerns such as the Italian election Graphs Graph 1: EURZAR-USDZAR implied correlation at highs Graph 2: ZAR vols elevated compared to EURUSD vols EFTA01416155 Graph 3: 6m realized correlation vs. strike Graph 4: ly realized correlation vs. strike Sources: Deutsche Bank, Bloomberg Finance L.P. Disclaimer: http://globalmarkets.db.com/new/content/3045.html fcid:[email protected] Martin Zeman Director I Key Client Partners Deutsche Bank Wealth Management DB Securities Inc 345 Park Avenue, 10154-0004 New York, NY, USA Tel. 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