1 CRDB BANK LTD The Bank that Listens

2 Presentation to Clients on KYB Cotton Workshop 14 March 2005 Mwanza By KYB Team and CRMG

3 Introduction: Product Concept & Principal How it works Experience Timing Pricing Transaction Flow Important Documentation Closing the Contracts Way Forward Outline

4 CRDB Bank and CRMG - World Bank partnered 2 years ago to develop and offer Kinga Ya Bei (KYB) to clients KYB offers opportunity for farmers/ exporters to hedge against price risk for their physical products through the world financial market for futures and options. CRDB & CRMG assist in risk exposure assessment while CRDB also serves as market intermediary in purchase of KYB Introduction

5 Risk Exposure If you – Sell before you Buy, OR Buy before you Sell You have risk. VOLUME (MT)APRMAYJUNEJULYAUGSEPTOCTNOVDECJANFEB PURCHASE SALES LONG Risk Assessment

6 Risk Positions Long position –Purchase before selling –Risk is market will move up Short position –Sell before purchasing –Risk is market will move down

7 Breakeven Analysis - I Determine the price you need to protect by determining you breakeven point Costs (ginning, transportation, levies,etc) Purchase Price250 Breakeven Price 1kg/ seed 400 X 3 (conversion to lint) Profits from sale of cotton seed(140) Breakeven w/ Purchase Price 250 tsh/ kg1060 Conversion to $/lb0. 44 $/lb

8 Adding in Costs to Determine Protection Price Breakeven Costs0. 44 $/lb + FOB Costs (Dar Port).06 +CIF Costs Protection Price on the International Market (CIF).50 $/lb

9 Breakeven Analysis - II Determine the price you need to protect by determining you breakeven point Costs (ginning, transportation, levies,etc) Purchase Price300 Breakeven Price 1kg/ seed 450 X 3 (conversion to lint) Profits from sale of cotton seed(140) Breakeven w/ Purchase Price 250 tsh/ kg1210 Conversion to $/lb0. 50 $/lb

10 Adding in Costs to Determine Protection Price Breakeven Costs0.50 $/lb + FOB Costs (Dar Port).06 +CIF Costs Protection Price on the International Market (CIF).56 $/lb

11 Option Contract Definition: A tool that provides price protection on the global market (New York) It can protect a global price minimum or a global price maximum for a cost (premium). The right to buy or sell a futures contract within a specific period of time at a specific price level (exercise price).

12 How does it work? Options Contract – Simple Example: in June … Ginner purchases or sets price for cotton in June Ginner does not know the market prices from Sept – March when cotton sales are made

13 What should be done? In June: Can purchase option contract for Sept- March to protect global market price from going down Will have a chance to select strike price to be protected Have to pay premium as the purchase cost

14 Throughout Sept – March As ginner fixes price on sale of physical cotton, can settle or sell option contract to close it If prices have fallen below strike price, union receives the settlement price which is close to the difference between market and strike price when the option is closed

15

16 Transaction Flow Purchase or Price Cotton with Farmers Purchase a Put Option Contract Sell Cotton to Buyers Pass Cotton Through Gin Close out position Physical Transaction Financial Transaction

17 Timing The purchase and sale of options contracts must be linked to the purchase/sale of your physical stock Buy protection immediately when you have bought/sold the physical stock Sell protection immediately when you have sold/bought physical stock

18 Pricing The price of options contracts changes every day/ minute The cost of the option contract is like an insurance premium Once you pay it you will not get it back The broker and CRDB both add small commission The cost of the option is quoted in dollars per pound (LB) Multiply by quantity Currency Risk

19 {End of Protection} {Level of Protection} {Type of Protection} {Price of Protection} Actual Costs with Cotton Market (NYBOT) at $.53 11/3/05 MONTH STRIKE $/ lb P/CPRICE $/ lb Jul P.01 Jul P.0126 Jul P.0158 Jul P.0194 Jul P.0234 Jul P.0280 MONTHSTRIKEP/CPRICE Oct P.0179 Oct P.0212 Oct P.0249 Oct P.0289

20 AN EXAMPLE

21 Breakeven Analysis - I Determine the price you need to protect by determining you breakeven point Costs (ginning, transportation, levies,etc) Purchase Price250 Breakeven Price 1kg/ seed 400 X 3 (conversion to lint) Profits from sale of cotton seed(140) Breakeven w/ Purchase Price 250 tsh/ kg1060 Conversion to $/lb0. 44 $/lb

22 Adding in Costs to Determine Protection Price Breakeven Costs0.44 $/lb + FOB Costs (Dar Port).06 +CIF Costs Protection Price on the International Market (CIF).50 $/lb

23 {End of Protection} {Level of Protection} {Type of Protection} {Price of Protection} Actual Costs with Cotton Market (NYBOT) at $.53 11/3/05 MONTH STRIKE $/ lb P/CPRICE $/ lb Jul P.01 Jul P.0126 Jul P.0158 Jul P.0194 Jul P.0234 Jul P.0280 MONTHSTRIKEP/CPRICE Oct P.0179 Oct P.0212 Oct P.0249 Oct P.0289

24 Sample Cost of Transaction Nybot indications (web)$ Cost of OTC Commission$ Broker Commission$.002 = Total Cost per pound$.0329

25 Cost per pound$.0329 X Number of lbs of cotton to protect**220,462 = Total Cost USD for 100 MT$7253 +CRDB Transaction CostTBD **Number of lbs per ton MT = 220,462 lbs Sample Cost of Transaction for 100 MT

26 Outcome – Sell Physical in Sept, Close Out Options Contracts (Global Market is $.44) PhysicalFinancial (Put Option at $.53) Purchase Price Global Equivalent $.50 Sale Price Global Equivalent $.44 Total Loss/ Gain on physical - $.06 Payout From Contract**$.09 Cost of Protection.0329 Total Loss/ Gain on* contract +$.0571 *This is only approximate Loss on PhysicalGain on Financial - $0.06$0.571

27 In July Purchased 100 MT for NY Equivalent of $.50 Purchase a Put Option Contract to $.53 at Cost of $.0329 In Sept, Sell Cotton to Buyers at NY Price of $.44 Pass Cotton Through Gin Close out position by selling contract back* Physical Transaction Financial Transaction Three months pass and market falls to $.49 *Receive approximately the difference between the strike price and the market price for the contract

28 Closing the Contracts Once you purchase the option you own it and monitoring the value of it is an ongoing activity You must watch the market and "do something with it" every time you make a physical sale. You should close the contracts when you no longer need the protection, i.e. when you have sold your physical stock

29 Cont…… Option contract has to be settled or sold very soon after physical sales contracts have been made. If timing is not correct, NYBOT price can move back up and payout would not be available In order to close out the contract you must communicate with CRDB who will contact the broker for finalizing the transaction

30 Important Documentation Application Form – Purchase Order Purchase Order Legal Agreement Purchase Confirmation Settlement Document

31 Way Forward The goal of CRDB’s Kinga Ya Bei program is to have clients implementing price risk management strategies that help them improve their overall financial condition and protect from losses. Commit a day within the next four days for KYB team (CRDB & CRMG) to come and discuss with you a suitable plan. CRDB will provide a market update with premium indications (please sign up with CRDB for this service) If you are not available in the next four days you can contact CRDB Review contract documents and legal agreement

32 Thank You