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From: Jeffrey Epstein (jeevacation@gmail.com] Sent: 1/28/2014 12:27:48 PM To: Tazia Smith I; Paul Morris Subject: Re: Depressed options volatility makes 'Renmimbi weaker' hedges very cheap I KCP Capital Markets III sorry, questions about what do you think about china , are silly„„„„, lets pick a trade , have some back up and move. 1 am a trader / investor not as atrologist On Tue, Jan 28, 2014 at 12:24 PM, Tazia Smith < Classification: For internal use only Jeffrey - > wrote: Curious for your view on China. We're concerned about the defense of China's stability (even by our own Global Markets Research analyst, Jun Ma). China may be re-rating for longer-term stability as an 'emerged' market, but that our DB GEM Equity Strategist, Jean-Paul Smith, and his team may have the downside risk right in the nearer-term. Bulls point to estimates that the AUM in the trust sector only totalling Rmb 10.1 trillion (arguably too low), and that 93% of AuM in trust products could be "backed" (38% by central government, 34% by local governments, and 21% by large financial groups ). But Bears highlight that (a) bailouts by authorities won't be a sustainable solution to increasingly regular defaults, (b) they suggest the inherent moral hazard problem that will perpetuate high-risk borrowers leveraging the shadow banking system (vs. the proposed quotad bond market issuance and bank securitization channels that the government intends to promote to increase transparency and liquidity), and, (c) bears also point out that local authorities, supposedly on hand to intervene in troubled loans, are themselves highly indebted (currently account for the highest proportion of credit in China, and news flow of local government/ LGFV debt rollovers is becoming all too common - according to DB GEM Equity Strategists, 1/28/14). As Nav points out below, there is a crowded long China trade with leverage, financed by selling options. Calls on USDCNH present a convex payoff caused by investors selling too many options - timeframe on a move is uncertain which is why he picked 1y (2y options are not very liquid). Please see below, let us know your thoughts. Best Regards, Tazia --- Forwarded by Tazo SmithClbf on 01128,2014 11 58 AM --- From. Nav Gupta/cid To: Date: 01/2812014 09:44 AM Subject. Depressed options volatility makes 'Renrnimbi weaker' hedges very cheap KCP Capital Markets [II CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0 109274 SDNY_GM_00255458 EFTA01452329