Hedging risks with NYSE Liffe futures contract Kiev, 30 November 2011 Lionel Porte, Product Manager, Commodity Derivatives NYSE Liffe © NYSE Euronext. All Rights Reserved.

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Effective Hedging tool: Ingredients for success

NYSE Liffe Commodities - A “Price Benchmark” NYSE Liffe has a well established portfolio of Commodity futures contracts that act as “price benchmarks” for their respective underlying physical markets: Global Price Benchmarks Cocoa, Robusta Coffee, White Sugar European Price Benchmarks Milling Wheat, Rapeseed, Corn, Malting Barley UK Price Benchmark Feed Wheat

Contract basis & price convergence The delivery mechanism should reflect the practice of the underlying physical market – and preferably be based on a current physical contract The amount available for delivery against the contract should reflect commonly traded qualities If the contract is underpinned by an index or other reference price, the market should have confidence that this is a true reflection of physical market values N.B All current major agricultural commodity futures contracts are underpinned by standardised physical delivery terms

Free market conditions Government intervention Should be minimised but if it exists the market should be fully aware of the conditions under which intervention will be made Quotas, embargo, taxes for exports… all kind of sudden political actions can alter their role. Price volatility Price volatility (combined with free market conditions) is key to the successful development of commodity futures markets

Ingredients of Volatility Trading flows Currencies Information flows Freight Demand Tight supply Energy and food need InelasticDemand Uncertainty of needs Production Variables Stocks Climate changes New Producers Market Organizations WTO agreements, Free trade agreements CAP reforms Role of the public authorities Financial Sphere Financial investors Hedge funds Index funds Price Volatility A fragile balance, fierce competition, phasing out of safety nets

Market structure and access An active chain of producers, traders, processors and manufacturers Supported by a pro-active broking community (with access to finance) Global access for trading Secure and established central counterparty (CCP)

Examples of failure and success Contract (launch year) Active or Inactive Rationale for success/failure Amsterdam Potato Futures (1995) Inactive (-) Index not considered true reflection of spot market values Robusta Coffee Futures (2008) Active (+) Replaced previous Contract by extending deliverable base and increasing Contract size Rapeseed Oil Futures (2006) Government subsidies created abundance of cheap commodity Weather Futures (2001) Limited number of market participants and limited knowledge London Potato Futures (1991) Delivery convergence issues Corn Futures (2007) Replaced previous Contract by extending deliverable base but still has scope for development

Futures Markets versus spot Markets The future price is a function of the underlying and the basis (hence the notion of derivatives). The relationship between the spot and future price can widen or narrow – but (everything else being equal) the gap (known as ‘basis’) should narrow towards expiry of the future (cost of carry diminishes over time). At moment of expiry the gap is zero 3 months before exp Price 2 months before exp 1 months before exp Expiration Spot price Basis Futures price

How it works: Futures Pricing What is the notion of fair value of prices in the market Factors impacting the future price is the cost of carry What’s in it ? The financing  Interest rates and storage costs Futures prices= Spot Price + basis ( cost of carry +quality) Contango & Backwardation

Futures versus spot Market Price MAY Financial fees Storage Basis May March Freight Basis March Quality premium Spot Dec Physical Dec April May Time

Physical Markets correlation vs Futures Pricing a similar product to keep the correlation Quality Currency hedging Euro/Dollar Grain Export area North Africa, Middle East competitors Liquidity of the futures market benchmark Importance of keeping a stable basis in the time

Ukrainian Markets correlation vs Wheat Futures Source : Plantureux

Ukrainian Markets correlation vs Rapeseed Futures Source : Plantureux

Ukrainian Markets correlation vs Maize Futures Source : Plantureux

NYL Commodities: a secure, regulated market CLEARING RULES LCH Clearnet SA for Paris NYSE Liffe Clearing for London Initial margins Daily Margin calls Automatic position settlement MARKET SAFETY RULES Delivery Limits (Paris contracts) NYSE Liffe Market Surveillance AMF and FSA Regulation Individual Risk exposure FINANCIAL SECURITY Members’ equity capital requirements Clearing house’s capital requirements

Challenges & Conclusion NYSE Liffe is a long-established and well-respected provider of Commodity futures and options Contracts. Education – many operators know the mechanism but others are new to the futures markets Education is key and the exchange will be working alongside its partners to develop understanding of futures as a pricing, trading and hedging mechanism Liquidity – it takes time to build market open interest and liquidity and all players must remain committed to the market if it is to grow and succeed A sound physical delivery basis – the Exchange and its customers must ensure that the futures markets reflect physical market practice and that there is a credible and supportive arbitration service behind the Contracts Free market conditions – futures markets thrive in free market conditions that are absent from artificial price intervention

Access to the markets Exchange Fees Agricultural Paris NYSE Liffe Commodities (Malting Barley, Milling Wheat, Rapeseed and Corn) NYSE Liffe Exchange Fee: € 0.25 per lot Clearing House Fee: € 0.75 per lot Total: € 1 per lot Margin Requirements Outright Margin Intermonth Spread Malting Barley Futures (EOB) € 1800 per lot - Milling Wheat Futures (EBM) € 950 per lot € 150 Rapeseed Futures (ECO) € 1200 per lot € 313 Corn Futures (EMA) Skimmed Milk Powder € 750 per lot € 3600 per lot € 138

ISV & QV Codes for grains products Exchange Product Product Symbol NYSE Liffe Paris Malting Barley Futures yEOB Milling Wheat Futures yEBM Rapeseed Futures yECO Corn Futures yEMA QV Codes Rapeseed Futures IJA<CMDTY>CT<GO> PM 0#COM: Milling Wheat Futures CAA<CMDTY>CT<GO> PV 0#BL2: Corn Futures EPA<CMDTY>CT<GO> PZ 0#EMA: Malting Barley futures BRLA<CMDTY>CT<GO> EOB 0#EOB: Rapeseed Options IJA<CMDTY>OMON<GO> 0#COM+ Corn Options CAA<CMDTY>OMON<GO> OBM 0#BL2+ Milling Wheat Options EPA<CMDTY>OMON<GO> N/A 0#EMA+ Malting Barley Options BRLA<CMDTY>OMON<GO> OOB 0#EOB+

NYSE Liffe – Questions & Further Information Your contacts In Paris: Lionel Porte, Product Development lporte@nyx.com +33 1 49 27 19 29 Email:commodities@nyx.com Web and 15 mn delayed prices:www.nyx.com/commodities