Hedging Opportunities the new generation

A corporate that engages in any business activity in a currency other than its own local currency, has a foreign exchange exposure. Foreign Exchange Exposure

Possible FX Exposure Types Every corporation has a foreign exchange exposure. This includes –Importers –Exporters –Companies that have taken a foreign loan –Multinational companies that need to pay their employees salaries and taxes in different currencies.

Possible Hedging Tools Forward Deal Buy Vanilla Option Vanilla strategy (e.g. Risk Reversal) Buy a Knock Out Option Exotic Strategies

Comparing Forwards and Options Forwards: –Underlying exposure is offset by engaging in a Forward deal –Obligation to exchange funds on maturity date –No future potential of additional gains from market fluctuations

Comparing Forwards and Options Options –No obligation to exchange the underlying asset on maturity date (for the buyer) –Vast possibilities of tailoring unique solutions according to specific needs (OTC) –Opportunity to highly leverage one’s position

Illustration A European corporate is selling goods to a corporate in Great Britain. The corporate will receive 10 Million GBP in 9 months’ time

Analysis: –Receivables in GBP, cost base in EUR –The European company needs to convert these GBP into EUR –The European company will lose money if GBP/EUR rate depreciates Illustration

Hedging possibilities:  Forward Deal- Sell 10 Million GBP against EUR settling in 9 months at a fixed rate  Buy a Put GBP Call EUR Option  Enter into a Vanilla Strategy (Typically a Risk Reversal)  Exotic Option Strategies Illustration

Sell 10 Million GBP against EUR at a strike of 1.49, on the 27 of June 2006 Forward

Buy Vanilla EUR Put

Buy Vanilla GBP Put (ATM) A European company will profit if GBP/EUR trades above the Forward expiry Full protection from Strike price downwards

Risk Reversal

A European company will profit if GBP/EUR trades above the Forward Rate and below (the SP of the sold Call GBP expiry) Full protection from Strike price of the Put Euro option downwards No initial hedging costs (“Zero Cost”)

Buy GBP Put with KO

Buy Euro Put with 1.49 KO A European company will profit if GBP/EUR trades above the Forward expiry Full protection from Strike price downwards Smaller hedging cost on inception date

Regulations & Accounting Standards Increasing regulations (FAS 133, IAS 39) require special attention by CFO’s and Treasurers to possible Fx exposure

Exotic options strategies for corporates – why? Enables a hedger to decrease hedging costs A highly customizable hedging solution Provides the opportunity to create mixed strategies (Vanilla & Exotic – e.g. buy a vanilla, sell an exotic)

Exotic options hedging strategies Forward Extra Window European Knock In Step Premium Improver

Critical Hedging Tools Historical Data Volatility Surface Risk Management Tools Reporting Mark to market facility

Summary – Using SD-FX FX options can enable hedgers to profit from market fluctuations, customize tailor made solutions, while being completely hedged SD-FX allows you to price these options accurately and to abide by the accounting regulations For more details please contact: Irene Zaslavsky Tel: +44(0)