Deutsche Bank Markets Research

Global Cross-Discipline Date 4 September 2013

Simon Carter

Volatility Cross Asset Note

Aligning with multi-dimensional Fed uncertainty
At the moment, the market is facing higher levels of uncertainty with the Fed as the main source of risk:

Strategist (+44) 20 754-52198 simon-d.carter@db.com Pam Finelli Strategist (+44) 20 754-52198 pam.finelli@db.com Rocky Fishman, CFA Strategist (+1) 212 250-7994 rocky.fishman@db.com Aleksandar Kocic Research Analyst (+1) 212 250-0376 aleksandar.kocic@db.com Caio Natividade Strategist (+44) 20 754-55917 caio.natividade@db.com

The nominees for Bernankes successor could be controversial and their approval uncertain. In addition, the term for several other voting members expires soon, so there may be a very different Fed next year. The Fed is facing a dilemma that seems to be adding more confusion than clarity. It is forcing a bullish view through its forecast and rhetoric while trying to convince the market that it will remain both late and gradual. The market is not convinced that these can be reconciled. The Fed reaction function is also not clear, with multiple Taylor rules present 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 on managing risk rather than initiating new positions. Since practically all assets have been affected by the Fed, the optionality of owning cash has high value, while de-risking is difficult (especially in less liquid sectors) as cross-hedging has been compromised by breakdowns in correlation. We are buyers of 6M5Y straddles at 300bp as a way of establishing a long vol position in the belly of the curve. Unresolved uncertainties are likely to result in heightened sensitivity of rates to both economic data and headlines. Given how much higher rates have re-priced in the last three months, any retracement in case of traditional risk-off is likely to be massive. Similarly, deepening uncertainty around the Fed chairman succession and further Fed forecasts are likely to trigger another wave of repositioning and exacerbate a potential selloff in rates. The long position is likely to be rewarded on account of both gamma and delta. In risky assets, emerging market fixed income and corresponding currencies remain vulnerable as these assets have seen the most aggressive inflows in recent years, and the unwind of the carry trade is likely to continue to exert pressure as US rates rise. As investors switch to domestic funding, the pressure on currencies is likely to remain in place and can be further exacerbated with additional geopolitical complications in the Middle East. Given the market positioning and a generally optimistic economic outlook for the US, equities are likely to remain stable. Although additional upside could be challenged if rates sell off too hard too fast, it is more difficult to see a material decline. We like selling Mar-14 1500-1750 strangles on the S&P for 4.0% - setting up breakevens which are >5% beyond the indexs 6-month range. Prices are indicative and as of 3-Sep. The maximum downside on the long straddle trade is the premium at inception, while the maximum loss in the short 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 Rate-IG Spread 5Y Rage-EUR

Rolling 1-month correlations. Source: Deutsche Bank

________________________________________________________________________________________________________________ Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Volatility Cross Asset Note

2-Sep-13

Market overview
Spot
Current 1W chg 1M chg 1Y chg 3M implied volatility(%) Current 1W chg 1M chg 3M realised volatility(%) Current 1W chg 1M chg

1W change in 3M impllied volatility (%)

10Y USD Swap 10Y EUR Swap DXY JPY TWI Gold 10Y USD Swap 10Y EUR Swap DXY JPY TWI

1W change in 3M realized volatility (%)

10Y USD Swap* 10Y EUR Swap* DXY JPY TWI Gold WTI S&P500 E-Stoxx 50 Nikkei225

2.92 2.18 82.21 116.80 1395 107.65 1632.97 2721.37 13388.86

-5.4 -2.3 0.8 1.1 1.4 2.5 -1.5 -3.3 0.2 Spread

5.9 8.4 0.6 0.3 4.7 4.3 -3.2 -1.4 -3.5

53.5 23.9 0.8 -23.4 -13.6 11.2 14.5 10.9 41.5

9.7 7.4 7.5 11.8 21.3 24.7 15.8 20.0 25.9

0.1 -0.2 0.2 0.3 1.3 2.5 2.3 3.0 0.7

0.3 1.0 -0.1 1.0 0.8 3.4 3.1 2.9 2.4

9.6 6.0 7.5 12.4 22.3 19.4 12.5 18.3 32.0

Current

0.3 0.1 -0.2 0.0 -0.3 0.4 0.2 0.5 -2.4

1W chg

0.4 -0.1 -0.8 -0.6 -0.5 0.2 0.1 -0.4 -4.3

1M chg

* Implied vol=Price Implied Vol (see appendix)

Gold WTI S&P500 E-Stoxx 50 Nikkei225

WTI S&P500 E-Stoxx 50 Nikkei225

CDX IG -0.5 0 0.5 1 1.5 2 2.5 3 3.5 iTraxx Main -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1

CDX IG iTraxx Main

84.00 107.25

47.97 51.86

0.80 0.57

0.92 -2.73

Spot historical correlation matrix (underlying assets - log changes*)

Spot: DXY, 10Y USD Swap, S&P 500 DXY

84.03

Main movers
Spot = NOK TWI
3.1 2.9 2.7 2.5 2.3

-2y
111.63

2y History

Last
104.67

Max
114.63

Min
104.47

10Y USD Swap 10Y USD Swap 10Y EUR Swap DXY JPY TWI Gold WTI S&P500 E-Stoxx 50 Nikkei225 66 46 -70 -14 19 4 36 10

10Y EUR Swap 78 41 -73 -39 11 -16 37 35

DXY 7 -15 -59 -20 13 13 24 17

JPY TWI -34 -28 -13 21 -29 -30 -62 -42

Gold -11 -4 -43 7 40 -11 -4 -29

WTI 22 13 -11 -14 28 -1 22 11

S&P 500 20 6 -15 -31 16 47 64 11

E-Stoxx Nikkei 50 225 23 18 16 -1 -24 25 -25 -66 24 -22 41 23 71 47 34 22

S&P500

USD Swap

1623
82.03 80.03 78.03 76.03

1536 1449 1362 1275 1188

Spot = SPX

1,212.92

1,638.17

1,709.67

1,123.95

2.1 1.9 1.7 1.5 08-Dec-11 14-Aug-12 21-Apr-13

3M imp. vol. = USD/TRY

0.14

0.15

0.19

0.05

74.03 02-Apr-11

3M imp. vol. = EEM

0.34

0.25

0.53

0.15

* Upper triangle: 1M, daily changes. Lower triangle: 1Y, weekly changes. Outright changes for IRS (See appendix for colouring)
3m Implied Vol historical correlation matrix (underlying assets - changes*)

3M hist. vol. = NKY

Implied Vol: DXY, 3M10Y USD Swaption, VIX DXY
14% 13% 12% 11% 10% 9% 8% 7% 8% 7% 14% 13% 12% 10% 9%

0.23

0.33

0.37

0.13

10Y USD Swap 10Y USD Swap 10Y EUR Swap DXY JPY TWI Gold WTI S&P500 E-Stoxx 50 Nikkei225 23 36 -26 11 13 -8 -20 -18

10Y EUR Swap 33 -12 2 16 -29 -13 -21 3

DXY 36 12 33 26 1 24 20 -35

JPY TWI 27 20 41 17 2 34 47 22

Gold 19 9 23 6 26 17 45 1

WTI 12 1 29 6 43 34 47 14

S&P 500 15 10 52 25 29 52 77 -30

E-Stoxx Nikkei 50 225 22 18 12 5 52 24 41 41 21 -1 49 3 71 25 29 -3

VIX

USD Swaption

3M vol risk prm. = NKY

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 08-Dec-11 14-Aug-12 21-Apr-13

0.01

-0.07

0.06

-0.13

12M-3M vol. slope = USD/TRY

0.01

0.00

0.03

-0.01

1M correlation = JPY TWI-10Y EUR Swap

-0.64

-0.69

0.28

-0.84

6% 6% 02-Apr-11

1M correlation = WTIGold

0.07

0.36

0.77

-0.60

* Upper triangle: 1M, daily changes. Lower triangle: 1Y, weekly changes. Outright changes for IRS (See appendix for colouring)

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Page 2

Volatility Cross Asset Note

2-Sep-13

Cross Asset Moves - Historical Perspective

Spot - S&P500 vs DXY
SPX (lhs) 1703 1653 1603 1553 1503 1453 1403 1353 Aug-12 Dec-12 Mar-13 Jun-13 80.7 79.7 78.7 83.7 82.7 1553 81.7 1503 1453 1403 147 1353 Aug-12 Dec-12 Mar-13 Jun-13 11.3% Aug-12 Dec-12 Mar-13 Jun-13 5.7% 11.3% Aug-12 Dec-12 Mar-13 Jun-13 33.7% 117 127 15.3% 137 13.3% 6.2% 6.7% DXY (rhs) 1703 1653 1603

Spot - S&P500vs iTraxx Main

SPX (lhs) Itraxx (rhs) 87 97 107 21.3% 19.3% 17.3%

3m Vols - VIX vs DXY Implied

VIX (lhs) DXY (rhs)

3M Vols - VIX vs Realized iTraxx Main

VIX (lhs) Itraxx (rhs) 53.7%

8.2% 7.7% 7.2%

21.3% 19.3% 17.3%

48.7%

43.7% 15.3% 38.7% 13.3%

Spot - S&P500 vs 10Y USD Swaps

SPX (lhs) 1703 1653 1603 1553 1503 1453 1403 1353 Aug-12 Dec-12 Mar-13 Jun-13 10Y USD Swaps (rhs)

Spot - DXY vs iTraxx Main

87 3.01 83.7 2.81 2.61 2.41 2.21 2.01 1.81 1.61 79.7 147 78.7 Aug-12 Dec-12 Mar-13 Jun-13 11.3% 82.7 81.7 80.7 107 117 127 15.3% 137 13.3% 19.3% 17.3% DXY (lhs) Itraxx (rhs) 97 21.3%

3m Vols - VIX vs 10Y USD IRS Implied

VIX (lhs) 10Y USD IRS (rhs) 10.7% 9.7% 8.7% 7.7% 6.7% 5.7% Dec-12 Mar-13 Jun-13

3M Vols - DXY Implied vs Realized iTraxx Main

DXY (lhs) Itraxx (rhs) 53.7%

8.2% 7.7% 7.2%

48.7%

43.7% 6.7% 38.7% 6.2% 5.7% Aug-12 Dec-12 Mar-13 Jun-13 33.7%

Aug-12

Spot - DXY vs 10Y USD Swaps

DXY (lhs) 10Y USD Swaps (rhs) 3.0 83.7 82.7 81.7 80.7 2.0 79.7 78.7 Aug-12 Dec-12 Mar-13 Jun-13 1.8 1.6 2.8 2.6 127 2.4 117 2.2 107 97 87 Aug-12 147

Spot - iTraxx Main vs 10Y USD Swaps

Itraxx (lhs) 10Y USD Swaps (rhs) 1.6 1.8 137 2.0 7.7% 2.2 2.4 2.6 2.8 3.0 Dec-12 Mar-13 Jun-13 7.2% 6.7% 6.2% 5.7%

3m Implied Vols - DXY vs 10Y USD IRS

DXY (lhs) 10Y USD IRS (rhs) 10.7% 8.2% 9.7% 8.7%

3M Vols - iTraxx Main Realized vs 10Y USD IRS Implied

Itraxx (lhs) 53.7% 10Y USD IRS (rhs) 10.7%

9.7% 48.7% 8.7% 43.7%

7.7% 6.7% 5.7% Dec-12 Mar-13 Jun-13 38.7%

7.7%

6.7%

33.7% Aug-12 Dec-12 Mar-13 Jun-13

5.7%

Aug-12

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

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Volatility Cross Asset Note

2-Sep-13

Correlations - Spot
Minimum Spanning Tree : See Appendix. Thick Lines: Absolute Corr > 80%
1M Cross-asset correlations on the move (spot) highlights - top, bottom (2Y history) Spanning tree: a graphical tool that causality and dependency between assets, visualised through the Asset1 (X Asset2 (Y 0.46 axis) axis) clustering of variables with one common link (see 0.43 Top 1 Appendix). -0.74 RDXUSD DXY

2-month correlation

2-month correlation, 2 month ago

KOSPI2 RDXUSD USD/KRW USD/SGD Silver EEM EUR XAU BOVESPA IBEX CAD HSI DAX AS51 GBP

GBP

(2)
AUD

(1) The center of the action has been defined by global Asset1 Asset2 0.44 0.54 growth and the risky assets in Europe with Euro stocks having Top 2 the highest coordination with the rest of the sector -0.73 USD/TRY WTI including other non-US stock-0.80 markets, EU credit and growth metals. Asset1 Asset2 0.27
gqsg

gqsg

-0.84

CAD

(3)
DXY

USD/TRY

(2) G10 Top 3 FX decouples from most hubs due to a rangeHSCEI USD/BRL -0.65 -0.69 bound USD, with (3) precious metals joining as they regain a non-fiat currency status. (4) Agricultural commodities also Asset1 Asset2 0.28 0.30 -0.19 disconnected due to idiosyncratic harvest-related drivers.
gqsg

JPY

(2)

(1)
XCU

USD/MXN
ESTOX

HIVOL XAL NKY ITRX EU

USD/BRL

(6)
XOVER EU SNRFIN

CDX IG

-0.81 appear to be on the (5) Rates, especially US, EU and GBP, periphery as well, which is at first site counter-intuitive, as Asset1 Asset2 0.71 0.87 they remain the main factor behind the repricing in the last 0.00 Bottom 1 three months. because of the sheer magnitude SPX However, WTI -0.17 of corrections in rates, their move has been largely out of 0.58 0.87 whack withAsset1 reactionAsset2 of other assets.
USD/TRY XAU

Top 4

SNRFIN SUBFIN XOVER EU HIVOL XAL

EUR

USD/MXN CDX IG USD/TRY SUBFIN

ITRX EU IBEX XCU BOVESPA RDXUSD AS51 NKY

JPY

Corn

-0.04 2 spreads, which have been very sensitive to (6)Bottom Credit rates RDXUSD EUR TWI -0.36 moves, appear in between equities and rates on the MST Asset1role in Asset2 indicating their transmitting the effect 0.47 0.88 of interest rate moves, reflecting both asset rotation trends and risk Bottom 3 -0.22 SPX CAD TWI aversion trends. -0.29
Silver

gqsg

(4)

SPX

EUR 5Y

(5)

ESTOX

XAU WTI

GBP 5Y Wheat SEK UKX USD/BRL USD 5Y

EEM DAX SPX

HSI

(7) BRL shows degree of coordination with US rates. Asset1a high Asset2 0.67 0.86 The recent EMFX sell-off has been largely linked to rising Bottom 4 0.00 EEM CAD TWI US yields, coupled with lower EM growth and over--0.08 positioning.
Average spot correlation per basket (see Appendix for details)

gqsg

(2)
SMI AUD WTI

(7)

SMI

UKX

CHF

Equities
Corn DXY Wheat USD 5Y
71% 81%

Fx

Commodities

Fixed Income

(2)
CHF

KOSPI2

USD/SGD EUR 5Y SEK USD/KRW

GBP 5Y
61%

51%

41%

31%

21% Jan 12 Jan 13 Apr 12 Mar 12 May 12 Sep 12 Feb 12 Mar 13 Oct 12 Feb 13 Apr 13 May 13 Nov 12 Dec 12 Aug 12 Aug 13 Jun 12 Jul 12 Jun 13 Jul 13

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Volatility Cross Asset Note

2-Sep-13

Correlations - Implied Volatility

Minimum Spanning Tree : See Appendix. Thick Lines: Absolute Corr > 80%
1M Cross-asset correlations on the move (Implied Vol) - top, bottom (2Y history)

2-month correlation

2-month correlation, 2 month ago

Top 1

Asset1 (X axis) KOSPI2

Asset2 (Y axis) SEK TWI

0.29

0.70

0.68

-0.39 0.25 0.48 0.34

Asset1
EUR KOSPI2
XAL

Asset2

NKY

Top 2

XAU

GBP 2Y

-0.53 0.56 -0.06 0.45

JPY GBP USD/KRW USD/SGD CHF

CHF USD/TRY GBP 5Y XCU

Asset1 Top 3

Asset2

USD/SGD

USD 2Y

-0.48 0.70 0.77 0.59

DXY

Asset1
CAD

Asset2

Top 4

HSI

WTI

-0.36 0.22 0.75 -0.63 -0.63

0.85 0.01 -0.47 -0.47

SEK JPY

USD 5Y

USD/TRY

Asset1 Bottom 1

Asset2

XCU
AUD WTI DXY USD/BRL

USD/BRL XAU

USD/SGD

XCU

Asset1
XAL USD/MXN SEK Silver USD 5Y HSI BOVESPA

Asset2

EUR

BOVESPAAS51

Bottom 2

XCU

EUR 10Y

GBP UKX USD/MXN KOSPI2 CAD EUR 5Y DAX ESTOX IBEX Silver USD/KRW SMI SPX HSI EEM

EUR 5Y

Asset1 Bottom 3

Asset2

0.54 0.76 -0.26 -0.29 0.35 0.82 -0.49 -0.49

WTI EEM SMI

GBP 5Y RDXUSD AUD

USD/TRY

XCU

Asset1
SPX UKX

Asset2

Bottom 4
XAU

GBP TWI

XCU

ESTOX

USD/SGD

RDXUSD

IBEX DAX AS51

Average 3m Implied Vol correlation per basket (see Appendix for details)
90% 80%

Equities

Fx

Commodities

Fixed Income

NKY

70% 60% 50% 40% 30% 20% 10% 0% Apr 12 May 12 Apr 13 May 13 Feb 12 Mar 12 Feb 13 Oct 12 Mar 13 Dec 11 Nov 12 Dec 12 Jul 12 Aug 12 Sep 12 Jul 13 Aug 13 Jun 12 Jun 13 Jan 12 Jan 13

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Page 5

Volatility Cross Asset Note

2-Sep-13

Volatility risk premium and Volatlity Spreads

3m Volatility risk premium Z-score(2Y Sample)
Nikkei225 Nikkei225 JPY TWI JPY TWI Gold Gold S&P500 S&P500 E-Stoxx 50 10Y EUR Swap DXY WTI 10Y USD Swap -0.5 0 0.5 1 1.5 2 2.5 3 E-Stoxx 50 10Y EUR Swap DXY WTI 10Y USD Swap 0 0.5 1 1.5 2

3m IV-RV Ratio 2Y (current, 10%-ile, median, 90%-ile)

Median Current

Implied Volatility Spreads

USD Swap

2 -11 -11 10Y USD Swap 0 -13 -13 10Y EUR Swap -2 DXY -2 0 -13 -12 JPY TWI 2 4 4 -9 -8 12 14 14 9 0 Gold WTI 15 17 17 13 3 S&P500 6 8 8 4 -5 -9 E-Stoxx 50 10 13 13 8 -1 -5 4 16 19 18 14 5 1 10 Nikkei225 * Outright changes for UST. Upper triangle: 3M. Lower triangle: 1Y. Spread=Row - Column
Cross-asset implied vol spreads on the move (3m expiry)

EUR Swap 2

DXY

JPY TWI -2 -4 -4

Gold

WTI

S&P 500 -8 -10 -9 -5 3 3

E-Stoxx 50 -11 -13 -13 -9 0 -1 -4 6

Nikkei 225 -13 -15 -15 -11 -2 -3 -6 -2

Highest Z-score Volatility risk premium-Nikkei225

37% VRP Realized Implied
10%

Highest Risk premium (IV/RV Ratio) - WTI

VRP
153%

Implied

Realized 1.8
1.6 1.4 1.2 1 0.8

51% 41% 31% 21% 11% Oct 11

WTI

S&P500

27%

5%

133% 113%

25% 16% Dec 11 Aug 11 Feb 12 Jun 12 Oct 12 Dec 12 Aug 12 Feb 13 Jun 13 Apr 12 Apr 13 Aug 13

WTI

S&P500*

17%

0%

93% 7%
-5%

73% 0.6 53%

10Y USD Swap

DXY
10% 7%

-3%

-10%

0.4 0.2 5% Oct 11 Dec 11 Aug 11 Feb 12 Jun 12 Oct 12 Dec 12 Aug 12 Feb 13 Apr 12 Apr 13 0 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13

33% -13% Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13

-15%

Jun 13

Aug 13

13% Nov 11

10Y USD Swap

DXY*

Lowest Z-score Volatility risk premium-10Y USD Swap

11% VRP Implied Realized 4% 132% 112% 7% 2% 92% 5% 1% 72% 3% 0%

Lowest Risk premium (IV/RV Ratio) - Nikkei225

VRP Implied Realized
1.6

Cross-asset implied vol spreads on the move (1Y expiry)

14% 12% 10% 8%
1.2 1 0.8 0.6

10Y USD Swap

DXY
10% 8%

9%

3%

1.4

6% Dec 11 Dec 12 Feb 12 Jun 12 Aug 11 Aug 12 Feb 13 Jun 13 Aug 13 Oct 11 Oct 12 Apr 12 Apr 13

10Y USD Swap

DXY*

34% 24%

E-Stoxx 50

Gold E-Stoxx 50
Aug 13

52%
0.4

21% 1% -1% 32% 12% Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13
0.2 0

14% Dec 11 Apr 12 Feb 12 Jun 12 Dec 12 Apr 13 Aug 11 Aug 12 Feb 13 Jun 13 Oct 11 Oct 12

-1% Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

-2%

Gold*

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

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Page 6

Volatility Cross Asset Note

2-Sep-13

Risk Reversals and Skew

3M Risk Reversals (25P-25C) Z-score(2Y Sample)
10Y EUR Swap 10Y USD Swap 10Y USD Swap 10Y EUR Swap Gold DXY DXY JPY TWI Nikkei225 E-Stoxx 50 S&P500 WTI -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 WTI JPY TWI JPY TWI Gold E-Stoxx 50 WTI DXY S&P500 Nikkei225 E-Stoxx 50 S&P500 Nikkei225 -1.20 -10% -5% 0% 5% 10% 15% -1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 Gold 10Y USD Swap

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

Median Current

3M Butterfly Ratio: [25P + 25C] / 2 - ATM z-score(2Y Sample)

10Y EUR Swap

3M Butterfly Ratio: [25P + 25C] / 2 - ATM 3M Highest Z-score Risk Reversal(25P-25C)-10Y EUR Swap
Risk Reversal
17% 15% 13% 11% 0.7% 9% 0.2% 7% -0.3% 5% -0.8% Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13 3% Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13 JPY TWI DXY 10Y EUR Swap

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

10Y USD Swap

(current, 2Y 10%-ile, median, 90%-ile)

Median

Current

1.7%

1.2%

3M Lowest Z-score Risk Reversal(25P-25C)-WTI

Risk Reversal
14% 12% 10% -3% 8% -5% 6% 4% 2% 0% Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 -7% 1%

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

Gold

WTI

-1% S&P500

E-Stoxx 50

-9%

Nikkei225

-11% Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13 -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7%

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Page 7

Volatility Cross Asset Note

2-Sep-13

Volatility Slope and Carry

1Y (-) 1M implied volatility spread Z-score
10Y EUR Swap E-Stoxx 50 S&P500 DXY JPY TWI JPY TWI DXY Gold Nikkei225 WTI 10Y USD Swap Gold WTI -2 -1.5 -1 -0.5 0 0.5 S&P500 E-Stoxx 50 Nikkei225 0.6 0.8 1 1.2 1.4 1.6 S&P500 E-Stoxx 50 Nikkei225 0.8 0.9 1 1.1 1.2 1.3 1.4 Gold JPY TWI DXY 10Y USD Swap 10Y EUR Swap 10Y EUR Swap

1Y/1M implied vol ratio (current,1Y 10%-ile, median, 90%-ile)

Median Current
10Y USD Swap

6M6M forward vol / 6M spot vol

Median

Current

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

Volatility Slope 1M Implied Vol 1Y Implied Vol
3%

Most volatility term look flat or inverted Highest 1Y structures (-) 1M volatility spread-S&P500 relative Vol to Slope their 2-year history. 1M implied Vol 1Y Implied Vol
gqsg 41%

Highest 6M6M forward vol / 6M spot vol -S&P500

10%

11%
2%

9% 7% 5% 3%
-1% 1% 0%

This suggests that the surface already reflects some 8% of31% the expectation that vols will rise going into year6% end. 4%
gqsg

1.3 1.25 1.2 1.15 1.1 1.05

21%

2% 0%

11%

-2%

1
-4%

1% -1% -3% Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13

-2%

0.95 1% Aug 11 -9% Dec 11 Apr 12 Aug 12 Dec 12 Apr 13

-6%

0.9
-3%

Aug 13

-8% Aug 13 -10%

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

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

Vol Slope
55% 45% 35% 25%
-5%

Lowest 1Y (-) 1M volatility spread-WTI

Vol Slope
10%

Lowest 6M6M forward vol / 6M spot vol -Nikkei225

1M Implied Vol

1Y Implied Vol
55% 45%

1M implied vol

1Y implied vol
10%

1.17 1.12

5%

1.07
0%

35% 25% 15%

0%

1.02 0.97 0.92

15%
-10%

-10%

5% -5% -15% Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13

-15%

5% -5%

0.87 0.82 0.77

-20%

-15% Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13

-20%

Aug-13

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

Aug 13

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Page 8

Volatility Cross Asset Note

SPX Last level Previous close 1Y maximum 1Y minimum Z-score Percentile rank Close-close actual volatility Z-score Percentile rank 5D change in close-close actual vol Z-score Percentile rank Volatlity risk premium Z-score Percentile rank 25D risk reversal (25C-25P) Z-score Percentile rank 25D butterfly Z-score Percentile rank Implied daily market move Spot 1633 1638 1710 1353 1.5 88%

2-Sep-13

Equities
1M 15.2 15.1 20.2 9.8 -0.2 58% 1M 11.4 -0.5 39% 2.4 1.2 91% 1M 3.8 0.7 77% 1M -5.1 0.1 38% 1M 0.5 -0.5 30% 1M 0.95% Implied Volatility 3M 6M 15.8 16.5 15.7 16.3 19.2 19.8 11.5 13.1 -0.4 -0.5 48% 37% 3M 6M 12.5 11.9 -0.4 -0.8 47% 17% 0.2 -0.2 0.5 0.0 70% 40% 3M 6M 3.3 4.6 0.6 0.8 86% 73% 3M 6M -5.6 -5.7 0.5 0.8 58% 70% 3M 6M 0.6 0.6 -1.0 -0.9 18% 18% 3M 6M 0.98% 1.02%

3M Implied Volatility : E-Stoxx 50

1Y 17.3 17.2 21.6 14.6 -0.6 30% 1Y 11.9 -1.0 7% 0.2 1.4 94% 1Y 5.4 1.8 98% 1Y -6.0 0.9 72% 1Y 0.8 -0.1 36% 1Y 1.07%
42% 37% 24% 32% 27% 22% 14% 17% 12% Nov-11 May-12 Nov-12 May-13 9% Nov-11 Implied Vols Realized Vol 29%

3M Implied Volatility : SPX

Implied Vols Realized Vol

(2)
19%

(1)

May-12

Nov-12

May-13

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

Box plot* 180% 160% 30% 140% 120% 100% 10% 80% 60% ESTOX HSI UKX *10%,25%,75%, 90% (2yr Sample) SPX NKY 0% 20% Median current 40%

3M ATM Implied Volatility

Box plot* Median current

(3)

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

SPX

NKY

3M implied vol vs DIVA Estimated implied vols

TIT IM
48% Actual Implied Vols 43% 38% 33% 28% 23% 18% 19% 24% 29% 34% 39% 23% Sep-11 Estimated implied vols - DIVA model 48% 43% 38%

Top Deviation: Rank 1 : TIT IM Equity

Actual Implied Vol Current DIVA fair value 5% 4% 3% 2% 1% 0% -1% 33% -2% -3% -4%

ATM IV Term Structure: 3M-12M

Box plot* Median current 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ESTOX HSI UKX SPX NKY ESTOX Box plot*

3M Implied Correlation
Median current

SAN SQ G IM TEF SQ
28%

HSI

UKX

SPX

NKY

Dec-11

Mar-12

Jun-12

Oct-12

Jan-13

Apr-13

Aug-13

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

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

(1) SPX implied vol has risen in recent weeks despite very low realized vol across Top Deviation: Rank 3 : TEF SQ Equity Top Deviation: Rank 2 : G IM Equity the summer as Septembers growing geopolitical and economic catalyst calendar Actual Implied Vol Actual Implied Vol DIVA fair value Current DIVA fair value draw attention. Current 3-month ATM implied vol50% is close to the highest 3-month realized 41% vol level seen since 2011. 45% 36%
gqsg

3M 90%-110% IV skew
14% 12% 15% 10% 10% 8% 6% 4% 2% 0% ESTOX HSI UKX *10%, 25%,75%, 90% (2yr Sample) SPX NKY 5% 0% -5% -10% -15% -10% Box plot* Median current 20%

Volatility-Spot Relationship* : SPX

Market Implied Empirical

40% (2) As a 31% EuroStoxx 50 IV has risen as well but not as aggressively as SPX IV. 35% result, it is currently carrying better than SPX vol is.

(3) Nikkei implied & realized vol has had its own idiosyncratic behavior in recent 21% 25% months, featuring explosive RV and a persistently inverted curve amidst dramatic 16% 20% spot movements. Sep-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-13 Aug-13 Sep-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-13 Aug-13
* Y-axis: 1-day change in ATMF volatility. X-axis: 1-day change in spot. See appendix

26% gqsg

30%

-5%

0%

5%

10%

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Page 9

Volatility Cross Asset Note

2-Sep-13

Rates
USD 10Y Swaps Last level Previous close 1Y maximum 1Y minimum Z-score Percentile rank Close-close actual volatility (normal vol) Z-score Percentile rank 5D change in close-close actual vol Z-score Percentile rank Volatlity risk premium (IV/RV) Z-score Percentile rank 25D risk reversal (25C-25P) Z-score Percentile rank 25D butterfly Z-score Percentile rank Implied daily market move Spot 3.05 3.05 3.22 1.69 2.7 98% 3M 109 107 122 60 1.3 84% 3M 108 1.8 95% 2 0.6 79% 3M 1.01 -0.7 27% 3M -18 -2.2 3% 3M 0.44 0.6 72% 3M 6.8 Normal Implied Volatility 6M 2Y 108 107 106 106 116 107 66 80 1.3 1.4 88% 93% 6M 111 1.7 94% 2 0.6 82% 6M 0.97 -0.9 19% 6M -19 -2.7 0% 6M 0.47 4.1 98% 6M 6.7 2Y 116 1.6 94% 2 0.6 80% 2Y 0.92 -1.1 12% 2Y -16 0.3 55% 2Y 1.28 0.9 76% 2Y 6.6

Implied Volatility : USD 3M10Y Swaptions

5Y 102 102 102 86 0.9 79% 5Y 123 0.7 73% 3 0.6 81% 5Y 0.83 -0.8 23% 5Y -12 1.1 84% 5Y 3.17 0.5 71% 5Y 6.3
IV/RV Implied Vols Realized Vol

Implied Volatility : EUR 3M10Y Swaptions

1.6 1.4
IV/RV Implied Vols Realized Vol

121 101

1.6

80 70 60

1.4 1.2 1

1.2

81 61 41 21 1 Aug-12 Nov-12 Feb-13 May-13

50
0.8 0.6 0.4 0.2 0

40 30 20 10 0 Aug-12 Nov-12 Feb-13 May-13

0.8 0.6 0.4 0.2 0

Aug-13

Aug-13

Swap rates, 1Y History

3.4 2.9 100 2.4 80 1.9 60 1.4 0.9 0.4 EUR 2Y GBP 2Y USD 2Y *10%, 25%,75%, 90%(2yr Sample) EUR 10Y GBP 10Y USD 10Y 40 20 0 Box plot* Median current 140 120

ATM Implied Volatility - 3M Expiry

Box plot* Median current

EUR 2Y GBP 2Y USD 2Y *10%, 25%,75%, 90% (2yr Sample)

EUR 10Y

GBP 10Y

USD 10Y

Forward Money Market Curves

Fed Funds Future 43.5 38.5 SONIA EONIA 60 50 40

Swap Spreads
USD EUR GBP 40 35 USD

6M Carry
EUR GBP 300 250 200 USD

2s/10s Slope
EUR GBP

Basis Points

Swap Spreads

23.5 18.5 13.5 8.5 Sep 13 Nov 13 Feb 14 Apr 14 Jul 14

20 10 0

20 15 10

2s/10s

28.5

30

6M Carry (bp)

33.5

30 25

150 100 50 0

-10 -20

10

15

20

25

30

5 0

Expiration Date

Maturity (Years)

10

Maturity (Years)

15

20

25

30

-50

10

Forward (Years)

2Y Swaptions With Different Expiry

140 120 USD EUR GBP 120 110 100

10Y Swaptions With Different Expiry

USD EUR GBP

Costless Risk Reversals USD 2Y 5Y 10Y 30Y EUR 2Y 5Y 10Y 30Y 3M

-25/+74 -25/+43 -50/+75 -100/+115

1Y
-25/+55 -50/+85 -50/+66 -100/+111

5Y
-50/+62 -100/+122 -100/+103

10Y

Normal Vol

Normal Vol

100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10

90 80 70 60 50 40

-100/+106 -100/+96

GBP 2Y 5Y 10Y 30Y

3M
-25/+38 -25/+34 -50/+68 -100/+100

1Y
-25/+43 -50/+79 -50/+62 -100/+109

5Y
-50/+72 -100/+134 -100/+130

10Y

-100/+138 -100/+135

3M
-25/+42 -25/+36 -50/+71 -100/+105

1Y
-25/+46 -50/+85 -50/+64 -100/+115

5Y
-50/+77 -100/+142 -100/+139

10Y Tenor

Expiry Receiver swaption strike (lhs) vs break-even equivalent Payer strike (rhs), both measured in bp distance from the ATM strike

10

-100/+148 -100/+145

Expiry (Years)

Expiry (Years)

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Page 10

Volatility Cross Asset Note

DXY Last level Previous close 1Y maximum 1Y minimum Z-score Percentile rank Close-close actual volatility Z-score Percentile rank 5D change in close-close actual vol Z-score Percentile rank Volatlity risk premium Z-score Percentile rank 25D risk reversal (25C-25P) Z-score Percentile rank 25D butterfly Z-score Percentile rank Implied daily market move Spot 82 82 85 79 0.6 70%

2-Sep-13

Foreign Exchange
1M 7.6 7.6 8.8 5.2 -0.3 49% 1M 6.0 -0.6 32% 0.7 0.9 85% 1M 1.5 0.6 78% 1M 0.9 -0.2 57% 1M 0.1 -0.1 50% 1M 0.47% Implied Volatility 3M 6M 7.5 7.6 7.4 7.5 8.5 8.3 5.7 6.0 -0.4 -0.5 46% 44% 3M 6M 7.5 7.2 0.2 0.2 59% 77% -0.3 0.0 -0.8 0.3 17% 61% 3M 6M 0.0 0.4 -0.6 -0.4 29% 40% 3M 6M 1.5 1.8 -0.2 -0.3 59% 53% 3M 6M 0.2 0.4 -0.7 -0.7 18% 28% 3M 6M 0.46% 0.47%

1M Implied Volatility : DXY

1Y 7.9 7.9 8.3 6.6 -0.6 45% 1Y 6.4 -0.7 22% 0.0 -0.1 41% 1Y 1.6 1.6 98% 1Y 2.2 -0.5 46% 1Y 0.8 -0.7 34% 1Y 0.49%
RP Implied Vols Realized Vol 7%

1M Implied Volatility : JPY TWI

19% 14% 2% 9% 4% -1% -6%
Sep-11 Mar-12 Sep-12 Mar-13 RP Implied Vols Realized Vol

6% 4%

14% 12% 10% 8% 6% 4% 2% 0% -2%

Sep-11 Mar-12 Sep-12 Mar-13

6% 5% 4% 3% 2% 1% 0% -1% -2% -3%

0% -2% -4% -6% -8%

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

Box plot* 115% 110% 105% 100% 95% 90% 85% 80%
DXY AUD JPY EUR GBP CHF SEK CAD

3M ATM Implied Volatility

14% 12% 10% 8% 6% 4% Box plot* Median current

Median

current

(1)

2% 0%
DXY AUD JPY EUR GBP CHF SEK CAD

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

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

3M abs. Annualised Carry vs 3M Implied vol

17% 15%

3M3M Forward vol vs 3M Implied vol

15% 13%
$/BRL

ATM IV Term Structure: 1Y - 3M

2.5% 2.0% Box plot* Median current

3M avg correlation (basket with a common currency)

80% 70% 60% 50% 40% Median Current Realized Current Implied

(2)

$/MXN

(1)

Implied Vol

JPY

Forward Vol

13% 11% 9% 7%
EUR

1.5%
$/KRW AUD

11% 9% 7% 5%
SEK

1.0% 0.5%

30% 0.0% 20% 10% 0%

DXY AUD JPY EUR GBP CHF SEK CAD DXY AUD JPY EUR GBP CHF SEK CAD

GBP

-0.5% 6% 9% -1.0% 5% 8% 11% 14% 17%

5% 0% 3%

Carry

Implied Vol

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

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

Top Deviation 3M Carry vs 3M vols: $/MXN

3M Implied Vol 28% Estimated 3M Implied Vol

23%

Top Deviation 3M3M vs 3M vols: $/KRW A quick look at our charts shows some of Forward Vol 3M Implied Vol 25% main stories 3M3M the affecting currency markets 23% this year: (1) the JPY and (2) EMFX, which 21% account for one of the strongest FX trends 19% of recent years. 17%
gqsg

3M Risk Reversals (25C-25P)

6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4%
DXY AUD JPY EUR GBP CHF SEK CAD

Volatility-Spot Relationship* : DXY

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Market Implied Empirical

Box plot*

Median

current

18%

13%

8% Aug-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-13 Jul-13

The selloff in the former combines domestic 13% growth deceleration, bond over-exposure 11% 9% a hawkish Fed. the latter has been and 7% affected by its own dovish policy, especially 5% relative to the US. Aug-11 Mar-12 Oct-12 Apr-13
gqsg

15%

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

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

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Page 11

Volatility Cross Asset Note

WTI Last level Previous close 1Y maximum 1Y minimum Z-score Percentile rank Close-close actual volatility Z-score Percentile rank 5D change in close-close actual vol Z-score Percentile rank Volatlity risk premium Z-score Percentile rank 25D risk reversal (25C-25P) Z-score Percentile rank 25D butterfly Z-score Percentile rank Implied daily market move Spot 108 109 110 84 1.8 98%

2-Sep-13

Commodities
1M 26.5 25.7 34.8 16.1 -0.3 43% 1M 21.1 -0.3 45% 1.4 0.5 70% 1M 5.4 0.3 62% 1M 0.9 1.5 99% 1M 0.8 0.3 78% 1M 1.64% Implied Volatility 3M 6M 24.7 23.0 24.6 22.9 34.3 33.2 17.3 18.4 -0.7 -1.0 33% 26% 3M 6M 19.4 19.8 -0.8 -1.1 18% 21% 0.5 0.0 0.5 0.2 78% 59% 3M 6M 5.3 3.2 0.5 0.1 68% 60% 3M 6M -1.7 -4.0 1.2 1.0 98% 90% 3M 0.7 0.1 63% 3M 1.53% 6M 0.8 0.2 59% 6M 1.43%

1M Implied Volatility : WTI

1Y 20.3 20.2 30.5 18.3 -1.3 13% 1Y 21.0 -1.8 6% 0.2 1.2 92% 1Y -0.7 0.0 59% 1Y -5.3 1.1 81% 1Y 0.6 -0.3 50% 1Y 1.26%
56% 46% 36% 26% 16% 6% -4% -14% Sep-11 Mar-12 Sep-12 Mar-13 RP Implied Vols
30% Realized Vol 25% 20% 15% 10% 5% 0% -5% -10% -15% -20%

1M Implied Volatility : XAU

RP 30% 20% 10%
-10%

Implied Vols

Realized 10% Vol

5% 0% -5%

0%
-15%

-10% -20% Sep-11 Mar-12 Sep-12 Mar-13

-20% -25%

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

Box plot* 140% 130% 120% 110% 100% 20% 90% 80% 70% 60%
Wheat Corn XAL *10%, WTI 25%,75%, 90% (2yr Sample) Copper Zinc Gold Silver

3M ATM Implied Volatility

50% Box plot* Median current

Median

current

40%

30%

10%

0% *10%, 25%,75%, 90% (2yr Sample)

WTI Wheat Corn XAL Copper Zinc Gold Silver

Vol Slope (1Y/3M) vs Future Slope (1Y/3M)

1.13 1.08
Palladium

Vol Slope (12M-3M) vs 3M Implied vol

4%
Palladium

ATM IV Term Structure: 12M-3M

6% 4% Box plot* Median current

3M avg corr (basket with a common commodity)

60% 50% 40% 30% 20% Box plot* Median current

Vol Slope

0.98 0.93 0.88 0.83 0.78 0.73

Beans Corn

Vol Slope

1.03

Platinum

2% 2% 0% 0% -2% -4%
Brent WTI

(1) (2)

-2% -4% -6% 0.94 0.99 1.04

-6% -8%

10% 0% -10%
WTI Wheat Corn XAL Copper Zinc Gold Silver

Beans

0.89

-10% 27% 32% *10%, 25%,75%, 90% (2yr Sample)

Future Slope

17%

22%

3m Implied Vol

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

WTI

Wheat

Corn

XAL

Copper

Zinc

Gold

Silver

Top Deviation (Vol Slope vs Future Slope): Palladium

Vol Slope 1.22 1.17
1.007

Future Slope
1.009 1.008

1.12
1.006

Our correlation chart shows an interesting Top Deviation (Vol Slope vs 3M implied vol): Beans decoupling story in the asset class. (1) Base 3m Implied vol Vol Slope 43% and precious metals remain correlated to5% the 33% rest of the asset class, but (2) energy and 0% agriculture are decoupling. 23%
13% reflects idiosyncratic drivers coming into This -10% play, with geopolitical risk affecting energy 3% and the summer harvest effect affecting -15% -7% agriculture.
gqsg -17% gqsg

3M Risk Reversals (25C-25P)

6% 4% 2% 0% -2% -4% -6% -8% -10% -12% *10%, 25%,75%, 90% (2yr Sample)
WTI Wheat Corn XAL Copper Zinc Gold Silver

Volatility-Spot Relationship* : WTI

2.9% 2.4% 1.9% 1.4% 0.9% 0.4% -0.1% -0.6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Market Implied Empirical

Box plot*

Median

current

-5%

1.07 1.02 0.97 0.92 0.87 Aug-11 Mar-12 Oct-12 Apr-13

1.005 1.004 1.003 1.002

-20% Mar-12 Oct-12 Apr-13

Aug-11

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

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Page 12

4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

Appendix Reading the Cross Asset Monitor

Asset markets are increasingly connected, and most money managers can no longer afford concentrating on a single asset class. By giving a thorough review of price action across the globe, our new Cross Asset Monitor shows how today's key themes are affecting the different asset classes. It answers questions such as

Finally, we dedicate each of the subsequent pages to a given asset class. These contain information of interest to both specialists and non-specialists, with some of the details highlighted below. Technical terms and expressions 25-delta risk reversals: the risk reversal is a measure of the relative cheapness of calls relative to puts. A 25-delta risk reversal measures the spread between the implied volatility of the 25-delta call and that of the 25-delta put in the same underlying asset and maturity. Absolute skew (p.11): Absolute skew measures the difference between the price of a CDS index and its "fair value" based on the weighted average price of the underlying components. The higher the difference, the cheaper (or wider) is the index versus its individual constituents. The skew is expressed as a running spread in basis points. Basket correlation (p.9 and 10): these are analogous to the broad correlation baskets in p.2 and p.3, and measure the average correlation between time series with a common asset. In FX, it is the average correlation between the crosses in a TWI with one common cross (the JPY basket has USD/JPY, EUR/JPY, AUD/JPY and so on). In commodities, it is the average correlation of all commodities relative to a common one. CDS index skew (p. 11): this is the difference between the traded spread of the CDS index and its fair value computed using spreads of its single name constituents; a positive (negative) value of the skew indicates that CDS index protection is overbought (oversold) with respect to its single name constituents. CDS index spread dispersion (p. 11): these measures show how bunched together or dispersed single name spreads of a CDS index are. We show two measures for each index - central dispersion and right tail dispersion. Central dispersion shows how far apart single names are from the median spread name of the index portfolio; the higher the value of the measure, the greater is the dispersion in the portfolio. Right tail dispersion aims to capture the wide spread names in the portfolio. It is high when there are a number of names with significantly higher spread than the portfolio median spread. European fin./sov. systemic risk shorts (p. 11): these are the most optimum names to buy protection on in single name CDS form against further spikes in European systemic risk. The names are chosen as per our PCA-based methodology discussed in Hedging in Binary European Financial Markets
Page 13

Which asset class is responding more quickly to recent developments, and which one is lagging? How are options markets reacting to developments in the spot markets? Which assets are most inter-twined and what are their common drivers?

In the front page we highlight the most interesting points in the current monitor, focusing on the charts that best reflect the current environment. Page 1 provides a snapshot of global markets. we show levels, changes and correlations in the main indices, assets and implied vols. Pivotal assets are plotted historically for FX, equities and interest rates and we also present a special section on "main movers"; that is, the assets which have moved the most over the past month for each category of interest. Pages 2 and 3 look at spot and implied vol correlations from the unique angle of the minimum spanning tree (MST). MSTs link assets to one another based on correlation strength, therefore highlighting hubs where one asset exerts great influence on a group of assets (see the separate section below). The MSTs are followed by our diversification indices; these measure how connected the assets are within a given asset class, or which asset classes are more diversified, evaluated according to a ratio of volatilities (see separate section below). The most interesting correlations on the move are also highlighted. Pages 4, 5 and 6 cover the most important elements of the volatility surface: levels, smile and term structure. We compare vol risk premium across different asset classes and highlight the most significant discrepancies based on a zscore metric. A similar analysis is done for risk reversals and the term structure, where we also highlight opportunities with volatility carry (the distance between forward-starting implied vols and spot-starting vols).
Deutsche Bank AG/London

4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

(Credit Market Insights - European Systemic Risk Remains High, published 8 July 2011 and available at https://gm.db.com/QCStrategy). The names chosen are typically high beta names that are trading relatively tight in the CDS market. Note that we highlight names with a CDS spread of 1,000bp or lower. Correlation baskets (p.2, p.3): we measure the average exponential correlation between key assets in a common asset class. The constituents are given equal weights, and are as follows:

rate changes. To make them more easily comparable, we convert the interest rate normal vol to volatility on the underlying swap present value, derived through multiplying the normal volatility by the swap DV01. This makes rates vol directly comparable with the volatility of other asset classes, which generally referred as "price" volatility.

Equities: S&P 500, Eurostoxx 50, Nikkei 225, DAX 30, SMI, IBEX, HSI, HSCEI, KOSPI 200, ASX 200, RDX, MSCI EM, BOVESPA. Rates: 2, 5 and 10-year USD, EUR and GBP interest rate swaps. Foreign exchange: USD vs EUR, JPY, GBP, AUD, CAD, CHF, NOK and SEK. Commodities: WTI, Brent, Aluminium, Copper, Gold and Silver.

Volatility-to-spot relationship (p.7, 9, 10): This measures the 1-day change in 3month implied volatility (Y-axis) associated with a 1-day change in spot (X-axis), evaluated through 2 measures. The first is what's implied by the volatility smile using a "sticky-strike" calculation. The second applies a polynomial fit to a scatterplot of historical changes in implied vol versus changes in spot. This chart is a powerful tool to evaluate differences in implied versus empirical skew - or in other words, how sensitive the options market expects implied vols to be relative to spot, compared to how sensitive it's been in the past. Volatility risk premium: the distance between implied and realised volatility. The lookback window used to estimate realised volatility is the same as the tenor of the implied vol. We typically evaluate the ratio between the two when comparing risk premium across different asset classes, though we also use the outright spread in some of the later pages of the report (clearly specified). Z-score: the z-score is a measure that evaluates where a variable stands relative to its history. It standardizes any time series by calculating the distance between the current observation and the sample average, divided by its standard deviation. While the probabilistic interpretation of Z-score readings is only accurate for normally-distributed variables, it is still effective in comparing non-Gaussian data with different magnitudes. The Minimum Spanning Tree (MST) Concept The minimum spanning tree is a tool from graph theory that is widely used in industrial engineering. With finance data, the MST objectively highlights causality between assets, visualized through the clustering of variables with one common link. A tree is an undirected and connected graph without cycles. A spanning tree is a tree that connects all the vertices of the graph. The minimum spanning tree is the spanning tree with smallest weight amongst all possible spanning trees in 2 the same graph. As we defined "weight" to be 1 corr , our MSTs connect the most strongly correlated vertices.
Deutsche Bank AG/London

DIVA (p.7): The Deusche Bank Implied Volatility Analyzer. This model evaluates richness and cheapness of European stocks relative to key fundamental drivers: CDS spreads, realised vol, daily volume, absolute returns and earnings dispersion. It identifies value through a cross-sectional regression of major European stocks against this set of explanatory variables. In our equities page, we highlight the stocks that are most out-of-line with the DIVA fair value and plot their ATM volatility over time. For more details on DIVA, please refer to "Searching For Value In Implied Volatility", 08 September 2008. Equity implied correlation (p.7): This is a measure of the average implied correlation between constituents in an equity index. The implied correlations are captured through different sources of implied volatility. For more details, see "Trading Dispersion", 14 May 2007. Implied vol references: while the skew data is standardized according to the deltas, the central vol reference diverges according the convention in each asset class. In foreign exchange and precious metals, we use delta-neutral implied vols. In other commodities and rates, we use ATMF vols. Finally, in equities, we use ATMS volatility. Rates volatility: "normal" vs "price" vols (p.1,3, 4 and 8): We show interest rate vols in 2 distinct forms. Page 8 shows normal implied volatilities of interest rates, annualized and in basis point units, following the interest rate market convention. This measure is then compared to the realised volatility of swap
Page 14

4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

Figure 2: Building a minimum spanning tree

Figure 3: MST given a few distinct drivers

Source: Deutsche Bank 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 centre most clearly incorporates that theme. As is the usually the case, the hubs are not necessarily specific to one asset class.

Strongly correlated assets, likely with a common driver: This MST represents an environment where a common driver affects most assets. The effects of such driver crystalise more clearly in one pivotal asset, which then acts as reference for the others. An example would be when risk aversion is the sole driver of global markets, and shifts in investor appetite get more quickly (and most clearly) reflected in the S&P 500. Other assets then become more strongly correlated to this pivotal asset than to one another. In practice, the presence of one unique theme in markets typically leads to more linear structures, albeit united by a common driver in the middle. See the subsequent charts for more detail.

1 Joseph. 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)

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4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

Figure 4: MST given one distinct driver

Figure 5: MST given no distinct driver

Source: Deutsche Bank Source: Deutsche Bank

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. Our minimum spanning trees at different points in time As further guidance on how MSTs graphically represent environments, the charts below show MST snapshots of the world during different market conditions. We focused on distinct periods such as market shocks and low vol regimes.

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4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

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

st

Source: Deutsche Bank

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

st

Figure 8: MST snapshot on Dec 1 2005 (Nov + Dec05 data)

st

Source: Deutsche Bank

Source: Deutsche Bank

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4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

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

st

Figure 10: MST snapshot on Aug 18 2011 (Jun - Aug11 data)

th

Source: Deutsche Bank Source: Deutsche Bank

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4 September 2013 Volatility Cross Asset Note: Aligning with multi-dimensional Fed uncertainty

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

Source: Deutsche Bank

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

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Appendix 1
Important Disclosures Additional 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

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Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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.

3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

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 (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to 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.

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David Folkerts-Landau
Global Head of Research Marcel Cassard Global Head CB&S Research Asia-Pacific Fergus Lynch Regional Head Ralf Hoffmann & Bernhard Speyer Co-Heads DB Research Germany Andreas Neubauer Regional Head Guy Ashton Chief Operating Officer Research Richard Smith Associate Director Equity Research North America Steve Pollard Regional Head

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