EFTA00742185.pdf

From: Paul S Barrett To: Jeffrey Epstein <jeevacation@gmail.com> Subject: RE: 10 year swap spread Date: Mon, 22 Nov 2010 18:41:25 +0000 Attachments: nov22_10yr_swap_spread_valtiation.pdf Inline-Images: image001.jpg Example Buy 10MM of the 10yr treasury with a 2.625% coupon (ytm 2.97%) Borrow $9.SMM at 3month Libor + 75bps Pay fixed on $9.65MM on a 10yr swap Annual negative carry (per 10MM notional) = $84,000 Monthly negative carry (per 10MM notional) = $7,000 $ value per basis point = $8,800 per basis point So we need the spread to move lbp/month in our favor to cover the negative carry. Therefore if we put the trade on at +9bps and we move to 0bps spread we lose (1bp of carry PLUS 9 bps of DV01) 10bps or $88,000 per 10MM. Therefore if we put the trade on at +9bps and we move to 19bps spread we make (-1bp of carry PLUS 10bps of DV01) 9bps or 79,200 per 10MM. Attached spreadsheet shows more details. This is a trade we would only do at +9. If we don't get there we don't do the trade. Paul EFTA00742185 Paul Barrett, CFA Managing Director Global Investment Opportunities Group JPMorgan Private Bank 40W 57th Street, 33rd Floor, New York, NY 10019 paul.s.barrett@pmorgan.com From: Jeffrey Epstein [mailto:jeevacation@gmarl.com] Sent: Monday, November 22, 2010 12:48 PM To: Paul S Barrett Subject: Re: 10 year swap spread size and move per basais point after one month taking into account libor???? On Mon, Nov 22, 2010 at 9:58 AM, Paul S Barrett Swap Spread Idea: (Target entry at +9bps; currently at +15bps; target exit at +25bps) • wrote: Currently the spread between the 10 year treasury (2.81%) and the 10 year swap (2.96%) is 15 BPs. This spread has widened from a historic low -5 BPs in early September. As shown in the 5 year chart below, spreads historically run around 40 BP. If we go back further, the chart tells the same story. With announced QE2, the economics of the 10 year treasury lead us to believe yields will likely remain capped while the swap market (represents the investor community) will be driven by economic data. If the Q4 consumer spending and profits numbers surprise to the upside, swaps would likely move higher relative to Treasury yields. To achieve this exposure we buy the 10 year treasury and pay fixed on a 10 year treasury swap. We would match the DVOls making us hedged for equal shifts in UST vs swaps. You would borrow 95% of the Treasury cost at Libor + 75bps. EFTA00742186 tag Rice 15.7S I nit, on 03/07/CS $6.00 ...Average 41.2$ 1 Lew cn 03/26/10 .5.1$ This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, available at http://wwwjpmorgan.corn/pages/disclosures/email. The information contained in this communication is confidential, may be attorney-client privileged, may constitute inside information, and is intended only for the use of the addressee. It is the property of Jeffrey Epstein Unauthorized use, disclosure or copying of this communication or any part thereof is strictly prohibited and may be unlawful. If you have received this communication in error, please notify us immediately by return e-mail or by e-mail to jea®gmail.com, and destroy this communication and all copies thereof, including all attachments. EFTA00742187