Re: PVDSA chart + USDJPY Trade (C]

Classification: For internal use only

Long $Y Call Options. We like long expiry options to benefit from the present dislocation between interest rates and volatility

Deutsche Bank FX Strategists are calling for USDJPY of 115 by year-end 2014, and 120 by year-end 2015. See DB FX Blueprint published 1/9/14, and note that #2 of the top 10 themes of 2014 (p. 5-6) revolves around extended weakness in the Japanese Yen vs. USD.

Consider a 10year expiry $Y call option struck at 85 (spot fx 105, forward fx 77.70). Price 4.7% of USD notional

This option has four notable characteristics

• If $Y stays at these levels the option decays positively by approx 15.20% per year

• If $Y trades 90.00 at any time (arguably a scenario in which the option is no longer wanted) the option "knocks out" and becomes worthless. While $11 might decline to 90, our quantitative analysis indicates the probability of such a decline is significantly (double?) overpriced by the options market

• The premium of the option is quite sensitive to moves in $Y spot - which is atypical for a 10year option. This also results from the knockout feature. This means if $Y moves quickly by 5% the option increases / decreases in value by almost half, so If $Y rises to 110 or 115 the option can easily be unwound to monetize the profit

• The option costs roughly 1/3rd compared to the vanilla 85 strike call

• Maximum loss is premium paid

Classification: Confidential

Jeffrey:

Please find the chart of PDVSA 5% =0/28/15 price history below, as well as a description of the USDJPY 10yr trade that we briefly discussed on Friday.

Speak with you soon,
Tazia

Used with permission of Bloomberg Finance LP, 1/10/14

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