From: Daniel Sabba
To: "jeffrey E." <jeevacation@gmail.com>
CC: Paul Morris , Stewart Oldfield , Vahe
Stepanian , "Arian Dwyer" Richard
Kahn
Subject: Idea for US equity hedging... [C]
Date: Wed, 03 Jun 2015 13:42:47 +0000
Attachments: bianco's_piece.pdf
In image003.jpg
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 596+ 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 596+ 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 M0y US swap rates (CMS, 25bps
over its forward level).
Indicative transaction terms (as of 06/03/2015):
Client buys: OTC SPX 105%/95% Put Spread contingent on l0y USD CMS > atmf+25bps at expiry
Notional: USD50mm
Expiry: 18 Dec 2015
Offer (mid): 2.00% (1.60%)
Ref vanilla: 4.30%
Ref SPX future: 2115
Ref l0y fwd: 2.54%
SPX Implied volatility levels dose to historical lows
EFTA01192950
GRAB
n Actions • 90 TemplateF: 91) Hide 9S Table Volatility Compariso—n-7
Daily 02-Dec-2010 02-Jun-2015 260 LEL
- SPX Index IAMny IaLIVE RSA OD SPX Index Iaot
E2 SPX Index IV1ny kLIVE Ma PI OD SPX Index AMny LIVE
Spread(Absolute) Spread(Absolute)
Hi: • (1.) 6M 105% Mny 12.104 7" 35
• (2.) 6t1 95% Mny 16.839
•30
25
• 20
P-15
*10
Low ln.F7
Spread(Abs) S
Mny -4.735 • -4.00
Low:
-I 2011 I 2012 I 2013 I 2014 i 2015
Australia 61 2 9777 8600 Brazil 5311 2396 9000 Europe 44 20 7330 7500 garoany 49 69 9204 1210 Hong Kong 852 2977 6n00
Japan 81 3 3201 8900 Slompant 65 6212 1000 U.S. 1 212 318 2000 Cepe-loht 2015 Blomberg Finance .
SH 793879 6919-43617.4-'4un-15 10.11.26 EDT 68T-4.00
Please let us know if you would like to discuss. Best regards,
Daniel
Daniel Sabba
Key Client Partners
Deutsche Bank Securities Inc.
Email
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