From: Paul Morris Sent: 2/9/2015 11:58:25 AM To: Daniel Sabba Subject: RE: short crude vol strategy - follow-up analysis Classification: Public Hi there, pls give me a call when you get time, thx Paul Morris Managing Director Deutsche Bank Private Bank From: Daniel Sabba Sent: Thursday, February 05, 2015 5:50 PM To: Jeffrey E. Cc: Paul Morris; Vahe Stepanian; Richard Kahn Subject: RE: short crude vol strategy - follow-up analysis Classification: Public Jeffrey, Our structuring desk did further analysis on the transaction - please see below. As discussed, let's speak further tomorrow morning. Below numbers are still as of E00 yesterday: Here is the same table as earlier and additional explanation regarding what it means. Contract OAS CUS CLKS val strike 60% 43% 42% Strike Date 13-Jan-15 13-Jan-15 14-Jan-15 Realized vol 79% 77% 73% Implied • Realized -19% -33% -31% Current Implied 84% 56% 54% Let's focus on CL)5 (Apri115) and similar applies to the other nodes. Vol strike was 43% and realized vol has been 77%. If the index had exposure only to this contract and not at all to the other contracts, and if realized vol up to expiry of this contract were also 77% then the implied-realized diff is 43%-77% = -34%. That is massive. This does not mean that you would lose 34% of the notional, but at least illustrates that you should expect the loss to be big. How much you actually lose is a daily path dependent calculation and cannot be summarized in a few sentences. If realized vol was EXACTLY same as implied vol also, the gain/loss would not be zero, but is a path dependent function. Back of the envelope, with a 34% implied-realized difference, one can expect a loss of 17% because the index has a vega of, on average 0.5% of index notional; but at any given point in time even with vols unchanged, the vega could be anywhere between 0.33% and 0.67% (this is in steady state with vols unchanged, with changing vols, it could be a wider range). As we know, the strategy of the index is to sell 3 straddles (collecting premium); and delta hedges daily at the close (in other words, trades the gamma). One would expect to lose money trading the gamma and the thesis behind the index is that generally the money you lose trading the gamma < the premium collected. Since 13 Jan, on average the opposite has been true. Trading the gamma has been expensive because the underlying futures prices have moved a CONFIDENTIAL — PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0 115911 CONFIDENTIAL SDNY_GM_00262095 EFTA01456648