Buy ly expiry European style digital
binary option on EURUSD struck 5%
below spot @ 21% of payout (which i
think is too cheap)
current strike (spot 5%) would be
1.3120
At expiry if EURUSD has fallen by
more than 5% from current levels the
option payout is EURlms. Upfront
premium is EUR210k.
The option is liquid and can be
unwound at any time.
i) Yellen has done a poor job of
communicating the Fed's thinking but
its increasingly clear the Fed will
brake later than usual
ii) Betting on higher us interest
rates in the rates market isn't cost
effective because the forward curve
is already pricing in higher rates
iii) The Dollar hasn't appreciated
yet because short rates in the US
haven't risen meaningfully
iv) THE KEY POINT - FX volatility is
very low in currency pairs like
EURUSD where central bank policy on
each side is increasingly diverging.
The low vol makes this bet
inexpensive to put on.
v) Because FX vol is so low betting
now or soon with a one year time
horizon costs very little. id rather
be early than late here
vi) i prefer ly expiry because this
trade could take 6-12mths to play
out
lY EURUSD VOL: Low - but then again
most most vols are
What I like about EURUSD is that
central bank policy on each side is
diverging
<2.49F0.gif>
This Table shows mid-market premiums
(in % of notional) as spot and time
change.
<4.47E4.gif>
19.5 is mid (offer is 21)
4) Scale into f4mm Nationwide (UK
Building Society) 6.875% perpetual
which yields 6.4% in GBP and is
likely to be called in Syears
European Bank AT1 HyBrid Bonds (aka
CoCo's) have rallied significantly.
We were unable to get the BBVA issue
at the right levels.
A very similar bond which has
rallied 30bp less than the BBVA is
the Nationwide (UK Building Society)
6.875% perpetual which currently
yields 6.4% and is likely to be
called in Syears time. It has a
tierl capital trigger of 7% and
current tierl capital ratio is 13%
which is fair margin.
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