EFTA01154985.pdf

From: Tazia Smith To: jeevacation@gmail.eom Cc: Paul Morris , Vinit Sahni Nay Gupta .-, Valle Stepanian Subject: 10yr S/Y.... [C] Date: Thu, 30 Jan 2014 23:26:33 +0000 Inline-Images: unnamed; unnamed(1); unnamed(2) Classification: Confidential Jeffrey - Below is the description and scenario analysis from Nav and team for the 10y USDJPY call option, strike 85 with American style KO at 90 (v spot). If you review and like the long-term position ("IRR" like trade, as Vinit said), our suggestion is to leg in, perhaps $5mm notional x2 for total $10mm notional. Let's discuss the below in the morning (Fri) and depending on your review/the market we can potentially add the first leg. Best Regards, Tazia -- Forwarded by Tazia Smith!db/dbcom on 01/30/2014 06:14 PM — Classification: Confidential The trade below is a structure to reduce the cost of a near-dated USDJPY call and express a long-term bearish view on the yen; it's a trade that Vinit and Nav have been kicking around to take advantage of dislocations in FX and like it a lot l0y Expiry: European style USDJPY 85.00 strike, call option which knocks out (KO) if $Y trades at 90 at any time during the life of the option Spot Ref 102.5 Mid market 4.0% of USD notional. Offer 4.35% Maximum loss is premium paid Indicative level only. Subject to market movement. Source: DB FX London, 1/30/14. Key Points: - We find that buyers often cheapen call options by selling in-the-money knockouts - so if the buyers view is "too right" the option knocks out and becomes worthless - Rather than "trying to be right, but not too right," consider buying call options which knock-out if spot trades down (ie. against your view) because in that case, you are wrong on the direction bet and probably do not want the option anymore. - The challenge is that is no one ever pays much for the out-of-the-money KO feature so its almost never worth doing - except, in our view, in USDJPY because long dated FX forwards trade so far below spot (due to the interest rate differential) that the 90 strike KO is worth a lot - arguably too much based on probabilities of where DB forecasts spot to roll up to. Simple scenario analysis for USDJPY Call option, strike 85 with American style KO at 90 Spot Ref 102.51, l0y Fwd 77.10 This analysis implies that all else except spot remains equal (eg. volatility, rates) At 90.0 and below the option is worth $0. Full premium would be lost. Max loss is premium paid. EFTA01154985  -12% -10% -5% 0% 5% 10% 15% Spot 90.21 92.26 97.38 102.51 107.64 112.76 117.89 7Y 0.05 1.1 3.7 6.4 9.1 11.8 14.4 8y 0.04 0.9 3.1 5.4 7.7 10.1 12.5 9y 0.04 0.8 2.6 4.6 6.7 8.8 10.9 lOy 0.03 0.7 2.3 4.0 5.8 7.7 9.6 Prices in %of USD notional Notes: 1. premium decays positively if spot is unchanged 2. the premium is sensitive to moves in spot - much more than a regular 10y option 3. the mid price for a 10year expiry 85 strike USDJPY call (without any KO feature) is 10.5% and the mid price for a lyear 102.51 strike call is 4% and compared with either of these the option with the KO feature has better risk:reward in Nav's opinion 4. we suggest sizing it to worst loss 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 Peacift,IV Pimponw 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. EFTA01154986