RE: DB FX trade idea: EURZAR-USDZAR 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

Title: DB FX Trade Idea
Instrument: EURMXN–USDMXN Correlation Swap
Firm/branding: Deutsche Bank (logo shown)

Trade Idea

Sell 1y 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 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 1y and 2y realized correlations are close to their highest levels, 3m realized correlation has fallen from recent highs to now sit close to
currentstrikes (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

The image is a chart that depicts the implied correlation between EURMXN and USDMXN over time. The chart includes two lines:

EURMXN-USDMXN 1y implied corr
EURMXN-USDMXN 2y implied corr

The X-axis shows the years from 2007 to 2017, and the Y-axis shows the implied correlation as a percentage, ranging from 20% to 100%.

Graph 2: MXN vols elevated compared to EURUSD vols

Graph 3: 1v realized correlation vs. strike

-5

-10

-15

-20

EURUSD-EURMXN 1y implied vol spread

-25

EURUSD-USDMXN 1y implied vol spread

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Graph 4: 2y realized correlation vs. strike

CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL

DB-SDNY-0089016
SDNY_GM_00235200
EFTA01387014