Db_volatility - Aligning With Multi-dimensional Fed Uncertainty

7/29/2019 Db_volatility - Aligning With Multi-dimensional Fed Uncertainty

1/23

Deutsche BankMarkets Research

Global Cross-Discipline Date4 September 2013

Volatility Cross Asset NoteAligning with multi-dimensional Fed

uncertainty

________________________________________________________________________________________________________________Deutsche Bank AG/London

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Simon Carter

Strategist

(+44) 20 754-52198

[email protected]

Pam Finelli

Strategist

(+44) 20 754-52198

[email protected]

Rocky Fishman, CFA

Strategist

(+1) 212 250-7994

[email protected]

Aleksandar Kocic

Research Analyst

(+1) 212 250-0376

[email protected]

Caio Natividade

Strategist

(+44) 20 754-55917

[email protected]

At the moment, the market is facing higher levels of uncertainty with the Fedas the main source of risk: The nominees for Bernankes successor could be controversial and their

approval uncertain. In addition, the term for several other voting membersexpires soon, so there may be a very different Fed next year.

The Fed is facing a dilemma that seems to be adding more confusionthan clarity. It is forcing a bullish view through its forecast and rhetoric

while trying to convince the market that it will remain both late andgradual. The market is not convinced that these can be reconciled.

The Fed reaction function is also not clear, with multiple Taylor rulespresent and an ambiguous metric for measuring the labor market.

Market reaction has been consistent with this distribution of uncertainty: The Feds guidance has been challenged as investors unwilling to put up

with the uncertainty have been both exiting trades and focusing onmanaging risk rather than initiating new positions.

Since practically all assets have been affected by the Fed, the optionalityof owning cash has high value, while de-risking is difficult (especially inless liquid sectors) as cross-hedging has been compromised bybreakdowns in correlation.

We are buyers of 6M5Y straddles at 300bp as a way of establishing along vol position in the belly of the curve. Unresolved uncertainties arelikely to result in heightened sensitivity of rates to both economic dataand headlines. Given how much higher rates have re-priced in the lastthree months, any retracement in case of traditional risk-off is likely to bemassive. Similarly, deepening uncertainty around the Fed chairmansuccession and further Fed forecasts are likely to trigger another wave ofrepositioning and exacerbate a potential selloff in rates. The long positionis likely to be rewarded on account of both gamma and delta.

In risky assets, emerging market fixed income and correspondingcurrencies remain vulnerable as these assets have seen the mostaggressive inflows in recent years, and the unwind of the carry trade islikely to continue to exert pressure as US rates rise. As investors switchto domestic funding, the pressure on currencies is likely to remain in

place and can be further exacerbated with additional geopoliticalcomplications in the Middle East.

Given the market positioning and a generally optimistic economic outlookfor the US, equities are likely to remain stable. Although additional upsidecould be challenged if rates sell off too hard too fast, it is more difficult tosee a material decline. We like selling Mar-14 1500-1750 strangles on theS&P for 4.0% - setting up breakevens which are >5% beyond the indexs6-month range.

Prices are indicative and as of 3-Sep. The maximum downside on the longstraddle trade is the premium at inception, while the maximum loss in theshort strangle trade is theoretically unlimited.

Figure 1: US rates uncertainty has

caused dramatic shifts in cross-asset

correlations

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0 5Y Rate-SPX 5Y Rage-EUR

5Y Rate-IG Spread

Rolling 1-month correlations. Source: Deutsche Bank


2/23


3/23

Volatility Cross Asset Note

Global Quantitative Strategy +44 207 545 5917 [email protected]

Cross Asset Moves - Historical Perspective

2-Sep-13

* Itraxx Realized vol=Stdev. Of daily log-changes in spread

Spot - DXY vs 10Y USD Swaps Spot - iTraxx Main vs 10Y USD Swaps 3m Implied Vols - DXY vs 10Y USD IRS 3M

3m Vols - VIX vs 10Y USD IRS ImpliedSpot - DXY vs iTraxx MainSpot - S&P500 vs 10Y USD Swaps

Spot - S&P500 vs DXY Spot - S&P500vs iTraxx Main 3m Vols - VIX vs DXY Implied

1353

1403

1453

1503

1553

1603

1653

1703

Aug-12 Dec-12 Mar-13 Jun-13

78.7

79.7

80.7

81.7

82.7

83.7

SPX (lhs) DXY (rhs)

1353

1403

1453

1503

1553

1603

1653

1703


87

97

107

117

127

137

147

SPX (lhs) Itraxx (rhs)

11.3%

13.3%

15.3%

17.3%

19.3%

21.3%


5.7%

6.2%

6.7%

7.2%

7.7%

8.2%

VIX (lhs) DXY (rhs)

11

13

15

17

19

21

1353

1403

1453

1503

1553

1603

1653

1703


1.61

1.81

2.01

2.21

2.41

2.61

2.81

3.01

SPX (lhs) 10Y USD Swaps (rhs)

78.7

79.7

80.7

81.7

82.7

83.7


87

97

107

117

127

137

147

DXY (lhs) Itraxx (rhs)

78.7

79.7

80.7

81.7

82.7

83.7


1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

DXY (lhs) 10Y USD Swaps (rhs)

87

97

107

117

127

137

147


1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Itraxx (lhs) 10Y USD Swaps (rhs)

11.3%

13.3%

15.3%

17.3%

19.3%

21.3%


5.7%

6.7%

7.7%

8.7%

9.7%

10.7%

VIX ( lhs) 10Y USD IRS ( rhs)

5.7

6.2

6.7

7.2

7.7

8.2

5.7%

6.2%

6.7%

7.2%

7.7%

8.2%


5.7%

6.7%

7.7%

8.7%

9.7%

10.7%

DXY ( lhs) 10Y USD IRS (rhs)

33

38

43

48

53


4/23



Correlations - Spot

2-Sep-13

Minimum Spanning Tree : See Appendix. Thick Lines: Absolute Corr > 80%

Top 1RDXUSD

Asset1 (X

axis)

1M Cross-asset cor

Top 2USD/TRY

Asset1

Top 3HSCEI

Asset1

Top 4USD/TRY

Asset1

Bottom 1SPX

Asset1

Bottom 2RDXUSD

Asset1

Asset1

Bottom 3SPX

Asset1

Bottom 4EEM

Ave

21%

31%

41%

51%

61%

71%

81%

Jan12

Feb12

Mar12

Apr12

May12

Jun12

Equities

2-month correlation

ESTOX

XCU

NKY

JPY

UKX

SPX

DAX

SMI

IBEX

HSI

KOSPI2

EEM

AS51

RDXUSD

BOVESPAXAU

DXY

GBP

EUR

CAD

CHF

SEK

AUD

USD/KRW

USD/SGD

USD/MXN

USD/TRY

WTI

XAL

Silver

Wheat

Corn

USD 5Y

USD/BRL

EUR 5Y

GBP 5Y

CDX IG

ITRX EU

XOVER EUSNRFIN

SUBFIN

HIVOL

2-month correlation, 2 month ago

ESTOX

DAX

UKX

SPX

SMI

IBEX

HSIEEM

KOSPI2

AS51

NKY

RDXUSDBOVESPA

DXY

CHF

JPY

AUD

USD/MXN

EUR

CAD

GBP

SEK

USD/BRL

USD/KRW

USD/SGD

USD/TRY

WTI

XAU

XAL

XCU

Silver

Wheat

Corn

USD 5Y

GBP 5YEUR 5Y

CDX IG

ITRX EU

XOVER EU

SNRFINSUBFIN

HIVOL

Spanning tree: a g

dependency betw

clustering of varia

Appendix).gqsg

(1) The center of t

growth and the ris

having the highes

including other no

growth metals.gqsg(2) G10 FX decoup

bound USD, with

a non-fiat currency

disconnected duegqsg

(5) Rates, especia

periphery as well,

they remain the m

three months. Ho

of corrections in r

whack with reactigqsg

(6) Credit spreads

moves, appear in

indicating their rolmoves, reflecting

aversion trends.gqsg

(7) BRL shows a h

The recent EMFX

US yields, coupled

positioning.

(1)

(2)

(2)

(2)

(2)

(3)

(4) (5)

(6)

(7)


5/23



Correlations - Implied Volatility

2-Sep-13

Minimum Spanning Tree : See Appendix. Thick Lines: Absolute Corr > 80%1M Cross-asset correl

Bottom 4GBP TWI

Asset1

Bottom 2XCU

Average

Bottom 3USD/TRY

Asset1

Asset1

Bottom 1USD/SGD

Asset1

Top 4HSI

Asset1

Asset1

Top 3USD/SGD

Asset1

Top 1KOSPI2

Asset1 (X

axis)

Top 2XAU

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Dec11

Jan12

Feb12

Mar12

Apr12

Equitie

2-month correlation

ESTOXDAX

NKY

RDXUSD

UKX

SMI

SPX

IBEX

HSI

KOSPI2

AS51

EEM

BOVESPA

DXY

EUR

JPY

AUD

GBP

CAD

CHF

USD 5YSEK

USD/BRL

USD/KRW

USD/MXN

USD/SGD

USD/TRY

WTI

XAU

Silver

XAL

XCU

EUR 5Y

GBP 5Y

2-month correlation, 2 month ago

ESTOX

SPX

UKX

DAX

SMI

IBEX

KOSPI2

USD/KRW

AS51

RDXUSD

HSI

EEM

BOVESPA

DXY

JPY

NKY

AUD

GBP 5Y

GBP

EUR

CAD

CHF

SEK

USD/BRL

USD/TRY

USD/SGD

USD/MXN

WTI

XAU

Silver

XAL

XCU

USD 5Y

EUR 5Y


6/23



Volatility risk premium and Volatlity Spreads

2-Sep-13

* Last:Red, past Last 3M: blue, past last 2Y: grey

Highest Risk premium (IV/RV Ratio) - WTI

Lowest Risk premium (IV/RV Ratio) - Nikkei225Lowest Z-score Volatility risk premium-10Y USD Swap

3m Volati lity r isk premium Z-score(2Y Sample) 3m IV-RV Ratio 2Y (current, 10%-i le, median, 90%-ile)

Highest Z-score Volatility risk premium-Nikkei225

Implied Vo

Cross-asset implied vol

Cross-asset implied vol

11%

21%

31%

41%

51%

Aug11

Oct11

Dec11

Feb12

Apr12

Jun12

Aug12

Oct12

Dec12

Feb13

A p r 1 3

WTI S&P500

-0.5 0 0.5 1 1.5 2 2.5 3

Nikkei225

JPY TWI

Gold

S&P500

E-Stoxx 50

10Y EUR Swap

DXY

WTI

10Y USD Swap

-13%

-3%

7%

17%

27%

37%

Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13

-15%

-10%

-5%

0%

5%

10%VRP Realized Implied

-1%

1%

3%

5%

7%

9%

11%

Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

-2%

-1%

0%

1%

2%

3%

4%VRP Implied Realized

USD EUR J

Swap Swap T

10Y USD Swap 2 2

10Y EUR Swap -2 0

DXY -2 0

JPY TWI 2 4 4

Gold 12 14 14

WTI 15 17 17

S&P500 6 8 8

E-Stoxx 50 10 13 13

Nikkei225 16 19 18

* Outright changes for UST. Upper triangle: 3M. Low

DXY

13%

33%

53%

73%

93%

113%

133%

153%


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8VRP Implied Realized

12%

32%

52%

72%

92%

112%

132%


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

VRP Implied Realized

5%

Aug11

Oct11

Dec11

Feb12

Apr12

Jun12

Aug12

Oct12

Dec12

Feb13

10Y USD Swap DXY

14%

24%

34%

Aug11

Oct11

Dec11

Feb12

Apr12

Jun12

Aug12

Oct12

Dec12

Feb13

A

1 3

E-Stoxx 50

6%

8%

10%

12%

14%

Aug11

Oct11

Dec11

Feb12

Apr12

Jun12

Aug12

Oct12

Dec12

Feb13

10Y USD Swap

0 0.5 1 1.5 2

Nikkei225

JPY TWI

Gold

S&P500

E-Stoxx 50

10Y EUR Swap

DXY

WTI

10Y USD Swap

Median Current


7/23



Risk Reversals and Skew

2-Sep-13

3M Risk Reversals (25P-25C)-(current, 2Y 10%-ile, median, 90%-ile)

Highest current 3M risk reversal (25P - 25C) - E-Stoxx 50

3M Butterfly Ratio3M Risk Reversals (25P-25C) Z-score(2Y Sample)

3M Highest Z-score Risk Reversal(25P-25C)-10Y EUR Swap (curren

3M Butt

3M Lowest Z-score Risk Reversal(25P-25C)-WTI Lowest current 3M risk reversal (25P - 25C) - JPY TWI

-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00

10Y EUR Swap

10Y USD Swap

Gold

DXY

JPY TWI

Nikkei225

E-Stoxx 50

S&P500

WTI

-10% -5% 0% 5% 10% 15%

10Y USD Swap

10Y EUR Swap

DXY

JPY TWI

Gold

WTI

S&P500

E-Stoxx 50

Nikkei225

Median Current

-0.8%

-0.3%

0.2%

0.7%

1.2%

1.7%

Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13

Risk Reversal

0%

2%

4%

6%

8%

10%

12%

14%

Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

Risk Reversal

3%

5%

7%

9%

11%

13%

15%

17%


Risk Reversal

-11%

-9%

-7%

-5%

-3%

-1%

1%


Risk Reversal

-1.20 -1.00 -0.8

10Y EUR Swap

10Y USD Swap

Gold

WTI

JPY TWI

E-Stoxx 50

DXY

Nikkei225

S&P500

-0.1% 0.1% 0

10Y USD Swap

10Y EUR Swap

DXY

JPY TWI

Gold

WTI

S&P500

E-Stoxx 50

Nikkei225


8/23



Volatility Slope and Carry

2-Sep-13

Lowest 6M6MLowest Zscore 1Y (-) 1M volatility spread-WTI Lowest 1Y (-) 1M volatility spread-WTI

Highest 6M6

1Y (-) 1M implied volati lity spread Z-score 1Y/1M implied vol ratio (current ,1Y 10%-ile, median, 90%-ile)

Highest Zscore 1Y (-) 1M volatility spread-10Y EUR Swap Highest 1Y (-) 1M volatility spread-S&P500

6M6

-2 -1.5 -1 -0.5 0 0.5

10Y EUR Swap

E-Stoxx 50

S&P500

JPY TWI

DXY

Nikkei225

10Y USD Swap

Gold

WTI

0.6 0.8 1 1.2 1.4 1.6

10Y USD Swap

10Y EUR Swap

DXY

JPY TWI

Gold

WTI

S&P500

E-Stoxx 50

Nikkei225

Median Current

-3%

-1%

1%

3%

5%

7%

9%

11%


-3%

-2%

-1%

0%

1%

2%

3%

Volatility Slope 1M Implied Vol 1Y Implied Vol

-15%

-5%

5%

15%

25%

35%

45%

55%

Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

-20%

-15%

-10%

-5%

0%

5%

10%

Vol Slope 1M Implied Vol 1Y Implied Vol

-9%

1%

11%

21%

31%

41%


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%Vol Slope 1M implied Vol 1Y Implied Vol

-15%

-5%

5%

15%

25%

35%

45%

55%


-20%

-10%

0%

10%

Vol Slope 1M implied vol 1Y implied vol

0.85

0.9

0.95

1

1.05

1.1

1.15

1.2

1.25

1.3

Aug 11 Dec 11 Ap

0.72

0.77

0.82

0.87

0.92

0.97

1.02

1.07

1.12

1.17

Aug 11 Dec 11 A

0.8 0.9

10Y USD Swap

10Y EUR Swap

DXY

JPY TWI

Gold

S&P500

E-Stoxx 50

Nikkei225

Most volatility term structures look flat or inverted

relative to their 2-year history.gqsg

This suggests that the surface already reflects some

of the expectation that vols will rise going into year-

end.gqsg


9/23



Equities

2-Sep-13

* Y-axis: 1-day change in ATMF volatility. X-axis: 1-day change in spot. See appendix

3M Implied Volatility : E-Stoxx 50

1Y Price History(rebased 100% 1Y ago)

ATM IV Term Structure: 3M-12M3M implied vol vs DIVA Estimated implied vols Top Deviation: Rank 1 : TIT IM Equity

3M 90%-110% IV skewTop Deviation: Rank 3 : TEF SQ Equity Top Deviation: Rank 2 : G IM Equity

SPX

Spot 1M 3M 6M 1Y

Last level 1633 15.2 15.8 16.5 17.3

Previous close 1638 15.1 15.7 16.3 17.2

1Y maximum 1710 20.2 19.2 19.8 21.6

1Y minimum 1353 9.8 11.5 13.1 14.6

Z-score 1.5 -0.2 -0.4 -0.5 -0.6

Percentile rank 88% 58% 48% 37% 30%

1M 3M 6M 1Y

Close-close actual volatility 11.4 12.5 11.9 11.9

Z-score -0.5 -0.4 -0.8 -1.0

Percentile rank 39% 47% 17% 7%

5D change in close-close actual vol 2.4 0.2 -0.2 0.2

Z-score 1.2 0.5 0.0 1.4


1M 3M 6M 1Y

Volatlity risk premium 3.8 3.3 4.6 5.4

Z-score 0.7 0.6 0.8 1.8


1M 3M 6M 1Y

25D risk reversal (25C-25P) -5.1 -5.6 -5.7 -6.0

Z-score 0.1 0.5 0.8 0.9


1M 3M 6M 1Y

25D butterfly 0.5 0.6 0.6 0.8

Z-score -0.5 -1.0 -0.9 -0.1


1M 3M 6M 1Y

Implied daily market move 0.95% 0.98% 1.02% 1.07%

Implied Volatility

9%

14%

19%

24%

29%

No12%

17%

22%

27%

32%

37%

42%

Nov-11 May-12 Nov-12 May-13

Implied Vols Realized Vol

60%

80%

100%

120%

140%

160%

180%

ESTOX HSI UKX SPX NKY

Box plot* Median current

*10%,25%,75%, 90% (2yr Sample)

0%

10%

20%

30%

40%

*

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%



*10%, 25%,75%, 90% (2yr Sample)

0%

2%

4%

6%

8%

10%

12%

14%



*10%, 25%,75%, 90% (2yr Sample)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

*1

-15%

-10%

-5%

0%

5%

10%

15%

20%

-

TIT IM

TEF SQ

SAN SQ

G IM

18%

23%

28%

33%

38%

43%

48%

19% 24% 29% 34% 39%

Estimated implied vols - DIVA model

ActualImpliedVols

23%

28%

33%

38%

43%

48%

S ep -1 1 D ec -1 1 Mar -12 J un -1 2 Oc t- 12 J an -1 3 A pr -1 3 A ug -1 3

Actual Implied Vol

Current DIVA fair value

20%

25%

30%

35%

40%

45%

50%

Se p-1 1 Dec-11 Mar-12 Jun-1 2 Oct -1 2 Jan-13 Apr -13 Au g-1 3

Actual Implied Vol


16%

21%

26%

31%

36%

41%

S ep -1 1 De c- 11 Ma r-1 2 Ju n- 12 O ct -12 J an -1 3 A pr -1 3 A ug- 13

Actual Implied Vol


(1) SPX implied vol has risen in recent weeks despite very low realized vol across

the summer as Septembers growing geopolitical and economic catalyst calendar

draw attention. 3-month ATM implied vol is close to the highest 3-month realized

vol level seen since 2011.gqsg

(2) EuroStoxx 50 IV has risen as well but not as aggressively as SPX IV. As a

result, it is currently carrying better than SPX vol is.gqsg

(3) Nikkei implied & realized vol has had its own idiosyncratic behavior in recent

months, featuring explosive RV and a persistently inverted curve amidst dramatic

spot movements.

(2)


10/23



Rates

2-Sep-13

USD 3M 1Y 5Y 10Y G

2Y -25/+74 -25/+55 2

5Y -25/+43 -50/+85 -50/+62 5

10Y -50/+75 -50/+66 -100/+122 -100/+106 1

30Y -100/+115 -100/+111 -100/+103 -100/+96 3

EUR 3M 1Y 5Y 10Y

2Y -25/+42 -25/+46

5Y -25/+36 -50/+85 -50/+77

10Y -50/+71 -50/+64 -100/+142 -100/+148

30Y -100/+105 -100/+115 -100/+139 -100/+145

Costless Risk Rev

Te

Forward Money Market Curves Swap Spreads

2Y Swaptions With Different Expiry 10Y Swaptions With Different Expiry

Swap rates, 1Y History

6M Carry

Impl ied Volat il ity : USD 3M10Y Swapt ionsUSD 10Y Swaps

Spot 3M 6M 2Y 5Y

Last level 3.05 109 108 107 102

Previous close 3.05 107 106 106 102

1Y maximum 3.22 122 116 107 102

1Y minimum 1.69 60 66 80 86

Z-score 2.7 1.3 1.3 1.4 0.9


3M 6M 2Y 5Y

Close-close actual volatility (normal vol) 108 111 116 123

Z-score 1.8 1.7 1.6 0.7

Percentile rank 95% 94% 94% 73%5D change in close-close actual vol 2 2 2 3

Z-score 0.6 0.6 0.6 0.6


3M 6M 2Y 5Y

Volatlity risk premium (IV/RV) 1.01 0.97 0.92 0.83

Z-score -0.7 -0.9 -1.1 -0.8


3M 6M 2Y 5Y

25D risk reversal (25C-25P) -18 -19 -16 -12

Z-score -2.2 -2.7 0.3 1.1


3M 6M 2Y 5Y

25D butterfly 0.44 0.47 1.28 3.17

Z-score 0.6 4.1 0.9 0.5


3M 6M 2Y 5Y

Implied daily market move 6.8 6.7 6.6 6.3

Normal Implied Volatility

0

10

20

30

40

50

60

70

80

Aug

1

21

41

61

81

101

121

Aug-12 Nov-12 Feb-13 May-13 Aug-13

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6IV/RV Implied Vols Realized Vol

0.4

0.9

1.4

1.9

2.4

2.9

3.4

EUR 2Y GBP 2Y USD 2Y EUR 10Y GBP 10Y USD 10Y


*10%, 25%,75%, 90%(2yr Sample)

0

20

40

60

80

100

120

140

*1

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25 30Maturity (Years)

6MCarry(bp)

USD EUR GBP

-50

0

50

100

150

200

250

300

2s/10s

8.5

13.5

18.5

23.5

28.5

33.5

38.5

43.5

Sep 13 Nov 13 Feb 14 Apr 14 Jul 14

Expiration Date

BasisPoints

Fed Funds Future SONIA EONIA

-20

-10

0

10

20

30

40

50

60

0 5 10 15 20 25 30

Maturity (Years)

SwapSpreads

USD EUR GBP

20

40

60

80

100

120

140

0 1 2 3 4 5 6 7 8 9 10

Expiry (Years)

NormalVol

USD EUR GBP

40

50

60

70

80

90

100

110

120

0 1 2 3 4 5 6 7 8 9 10

Expiry (Years)

NormalVol

USD EUR GBP


11/23



Foreign Exchange

2-Sep-13

* Y-axis: 1-day change in ATMF volatility. X-axis: 1-day change in spot. See appendix

3M abs. Annualised Carry vs 3M Implied vol 3M3M Forward vol vs 3M Implied vol

3M Risk Reversals (25C-25P)Top Devia tion 3M Carry vs 3M vols: $/MXN Top Devia tion 3M3M vs 3M vols : $/KRW

1Y Price History(rebased 100% 1Y ago)

ATM IV Term Structure: 1Y - 3M 3M

1M Implied Volatility : DXYDXY

Spot 1M 3M 6M 1Y

Last level 82 7.6 7.5 7.6 7.9

Previous close 82 7.6 7.4 7.5 7.9

1Y maximum 85 8.8 8.5 8.3 8.3

1Y minimum 79 5.2 5.7 6.0 6.6

Z-score 0.6 -0.3 -0.4 -0.5 -0.6


1M 3M 6M 1Y

Close-close actual volatility 6.0 7.5 7.2 6.4

Z-score -0.6 0.2 0.2 -0.7


5D change in close-close actual vol 0.7 -0.3 0.0 0.0

Z-score 0.9 -0.8 0.3 -0.1


1M 3M 6M 1Y

Volatlity risk premium 1.5 0.0 0.4 1.6

Z-score 0.6 -0.6 -0.4 1.6


1M 3M 6M 1Y

25D risk reversal (25C-25P) 0.9 1.5 1.8 2.2

Z-score -0.2 -0.2 -0.3 -0.5


1M 3M 6M 1Y

25D butterfly 0.1 0.2 0.4 0.8

Z-score -0.1 -0.7 -0.7 -0.7


1M 3M 6M 1Y

Implied daily market move 0.47% 0.46% 0.47% 0.49%

Implied Volatility

-6%

-1%

4%

9%

14%

19%

S-2%

0%

2%

4%

6%

8%

10%

12%

14%

Sep-11 Mar-12 Sep-12 Mar-13-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%RP Implied Vols Realized Vol

80%

85%

90%

95%

100%

105%

110%

115%

DXY AUD JPY EUR GBP CHF SEK CAD


*10% 25% 75% 90% (2yr Sample)

0%

2%

4%

6%

8%

10%

12%

14%

*10

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%



*10%, 25%,75%, 90%(2yr Sample)

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%



*10%, 25%,75%, 90% (2yr Sample)

0%

10%

20%

30%

40%

50%

60%

70%

80%

*10

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

Aug-11 Mar-12 Oct-12 Apr-13

3M3M Forward Vol 3M Implied Vol

$/KRW

$/BRL

SEK

AUD

5%

7%

9%

11%

13%

15%

5% 8% 11% 14% 17%Implied Vol

ForwardVol

JPY

EURGBP

$/MXN

5%

7%

9%

11%

13%

15%

17%

0% 3% 6% 9%

Carry

ImpliedVol

8%

13%

18%

23%

28%

Aug-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-13 Jul-13

3M Implied Vol Est imated 3M Implied Vol

A quick look at our charts shows some of

the main stories affecting currency markets

this year: (1) the JPY and (2) EMFX, whichaccount for one of the strongest FX trends

of recent years.gqsg

The selloff in the former combines domestic

growth deceleration, bond over-exposure

and a hawkish Fed. the latter has been

affected by its own dovish policy, especially

relative to the US.gqsg

(1)

(2)


12/23


13/23


14/23


15/23

4 September 2013

Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

Deutsche Bank AG/London

Figure 2: Building a minimum spanning tree

Source: Deutsche Bank

Different techniques can be used to build the minimum spanning tree. We

apply a modified version of Kruskal's algorithm1, keeping the branch lengths

constant for better visualization. But while branch distances don't change, we

modify their width to reflect stronger (thicker) and weaker (thinner) correlation.

We demonstrate the interpretation through 3 examples below:

High correlation within certain a category of assets, low correlation elsewhere:

This MST portrays the environment where a few themes drive the price action

of the entire set, leading to regional concentration. In this example, each hub is

defined according to a common driving theme, and the asset at the centremost clearly incorporates that theme. As is the usually the case, the hubs are

not necessarily specific to one asset class.

1Joseph. B. Kruskal: On the Shortest Spanning Subtree of a Graph and the Traveling Salesman Problem,

Proceedings of the American Mathematical Society, Vol 7, No. 1 (Feb, 1956)

Figure 3: MST given a few distinct driv


Strongly correlated assets, likely with

This MST represents an environment

assets. The effects of such driver cry

which then acts as reference for the

aversion is the sole driver of global ma

more quickly (and most clearly) refle

become more strongly correlated to t

practice, the presence of one unique t

linear structures, albeit united by a

subsequent charts for more detail.


16/23

4 September 2013


Page 16

Figure 4: MST given one distinct driver


Low correlations in general:

This example shows a lack of clear drivers of the set, reflected in the absence

of significant regional hubs. With little commonality, the dependency structure

is vague and therefore one cannot say what the common driver is. This is

analogous to situations where idiosyncratic factors are far more influential in

the price action than common market factors.

Figure 5: MST given no distinct driver


Our minimum spanning trees at differeAs further guidance on how MSTs g

charts below show MST snapshots

conditions. We focused on distinct pe

regimes.


17/23

4 September 2013



Figure 6: MST snapshot on Dec 1 st 2006 (Nov + Dec06 data)



18/23

4 September 2013


Page 18

Figure 7: MST snapshot on Sep 1 st 2008 (Jul + Aug08 data)


Figure 8: MST snapshot on Dec 1 st 200



19/23

4 September 2013



Figure 9: MST snapshot on Dec 1 st 2008 (Oct + Nov08 data)


Figure 10: MST snapshot on Aug 18 th 2



20/23

4 September 2013


Page 20

Figure 11: Long-term MST snapshot 11 years of daily data


Source for all charts and tables in this report: Deutsche Bank Global Markets

Research.

2012 Credit outlook:

https://gm.db.com/global_credit/pages/strategy/CrMrktinsight_biweekly/15390

94/grcm2011prod024308_web.pdf

2012 Equity Derivatives outlook:

https://ger.gm.cib.intranet.db.com/ger/document/pdf/GDPBD00000202165.pdf


21/23

4 September 2013


Deutsche Bank AG/London Page 21

Appendix 1

Important DisclosuresAdditional information available upon request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this

research, please see the most recently published company report or visit our global disclosure look-up page on our

website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,

the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation

or view in this report. Simon Carter/Rocky Fishman/Pam Finelli/Aleksandar Kocic/Caio Natividade


22/23

4 September 2013


Page 22 Deutsche Bank AG/London

Regulatory Disclosures

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2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

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Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise

to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash

flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a

loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the

loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse

macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation

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settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed

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FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the

index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended

to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon

rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is

also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be

received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options

in addition to the risks related to rates movements.


23/23

David Folkerts-LandauGlobal Head of Research

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