Measurisk Earnings at Risk February 27, 2001 Presented at

1. Measurisk.comEarnings at RiskFebruary 27, 2001Presented at

2. Nasdaq Drop Nasdaq Drop Asian Flu 95% VaR Euro Rally Definition: What is Value at Risk? • Summary statistic that quantifies the exposure across many assets/liabilities classes to market risk. • Identifies ‘How Much’ one can loses if adverse market conditions prevail. • Captures diversification or Portfolio Effect. • Measurisk Approach • Full Monte-Carlo Valuation-based without approximations • Risk calculation based on evaluation of log changes in market instruments • Method allows modeling of entire distribution of expected profits and losses and shape of risk surface over time and tail risk

3. Earnings at Risk and Corporate Treasury • Longer time horizon than traditional asset management • Multi-Step Monte Carlo • More data needed to define covariance matrix • View of multiple time horizons (I.e. Each quarter of the fiscal year) • Quantify risk across business lines • Ability to optimize trading activities - view impact of different hedging strategies

4. Earnings at Risk • Measure of earnings volatility • Income Statement Perspective • Used to define risk appetite • Can help answer “What should be hedged?” • Focus on market moves to: • FX Rates • Interest Rates • Commodity Prices • Perspective: Basket of Exposures (“Portfolio Effect”)

5. Earnings at Risk: Income Statement PerspectiveUnderstand What are the Market Sources of Earnings Volatility

6. Revenue Breakdown: FX & Commodity Exposures Revenues can fall $37 million due to correlated FX moves 60% of Revenues have FX or Commodity Exposure

7. Cost of Sales Breakdown: FX & Commodity Exposures Expenses can increase by $41 million due to changes in FX rates & commodity prices

8. Application: Net FX Exposures- What to Hedge?- Portfolio effect EURO adds the least diversification & greatest exposure Notice: Diversification Benefit

9. Application: Interest Expense • Tools to define: • What type of liability structure is appropriate? • % Fix Debt vs. % Floating Debt • Should a liability be swapped to fix/floating • Which debt issues are contributing the greatest to EAR? • Set limits on Interest Expense Risk (EAR) • Evaluate current EAR vs. Target

10. Evaluate Strategies: EAR vs. projected values Current mix, not very efficient Strategy D: 95% Floating Debt + Written EDF Options Strategy A: 95 % Fixed Debt + Swaps

11. Commodity Exposures:Unhedged Natural Gas Mean Cost is $6.92/MMBtu Left tail cost is $10.26/MMBtu

12. Commodity Exposures: Hedged Natural Gas Mean Cost is $6.49/MMBtu Left Tail Cost is $9.45 /MMBtu

13. Netted Exposures: Natural Offsets

14. EaR Analysis by QuarterView of the EAR in each quarter of the fiscal year (path dependent)

15. Scenario Analysis: Asian FluJuly-October ‘97

16. Measurisk Vision: Evolution of Corporate Risk • Integrate econometric and client defined models for Units of Revenue Sold • Enable joint simulation of market factors and revenue projections • Include pre-defined trading strategies based on market events

17. Earnings @ Risk Implementation • Measurisk works closely with the client in order to understand: • The breadth of their exposures, • Hedging activity • Data warehousing • Risk management procedures • Ultimate goals of the company from a risk management perspective. • A link between Fxpress and Measurisk • Enables a smooth and comprehensive flow of FX exposures and contracts • Fxpress also has the ability to house commodity detail • Ease of modeling for Measurisk

18. Earnings @ Risk Implementation (continued) • Data Requirements for full analysis: • Full Terms and Conditions for OTC Securities. • Valid Street Identifier for and Exchange Traded Securities • Reporting: • Measurisk provides results of analysis in a timely fashion through our dynamic & flexible online reporting tool, Intersight. • All reports are downloadable to a number of formats including Microsoft Excel. • Measurisk works closely with the client to customize reports and formats to best suit the clients needs • Iterative process

19. Interactive Web Analytics InterSight provides customized views of risk based on a tree hierarchy structure defined by clients. Risk is calculated at all levels of the hierarchy -- fund, account, position, security ID. Clients may incorporate raw and calculated proprietary data and analytics.

20. Risk Management Issues • For most companies, allocating the necessary resources is not feasible. • Places large demands on an organization • Requires Staff and Resources in 4 key areas • Data - Market & Security • Financial Engineering - Quants for modeling • Technology - Systems and Integration • Risk Management - producing, validating and using the results • Result is short-cuts and compromises • Accurate Risk Measurement is hard to do!

21. Measurisk Service Offering • Position and Market Data Management • Data mapping, staging and storage • Time series data collection and analysis • Market Risk Measurement • Full Valuation Monte Carlo VaR and Earnings-at-Risk • Stress testing and hedge effectiveness analysis • Risk Reporting • Standardized and customized reporting • Flexible risk aggregation • Interactive Web-based Risk Analysis • User-defined “what if” scenarios and overlay strategies • Intuitive browser-based user interface

22. Asset Class Coverage • Foreign Exchange (45 Countries) • Domestic and international equities and options • Sector-based factor model • Internally-developed stochastic volatility model • Emerging markets equity and debt (45 countries) • Fixed Income Products • Sovereign and emerging markets debt • High yield (credit spread model) • Asset backed securities (MBS, CMOs, CMBS) • Commodities • OTC derivatives • Interest rate, credit, foreign exchange, equity and commodities