Are convertible bonds really attractive? Alain Eckmann, CFA International Investment Italian Forum November 8th, 2007

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 1 Table of Contents SECTION 1 Convertibles an attractive investment!? 2 SECTION 2 The global convertible bond market 5 SECTION 3 Will convertible bonds stay attractive? 9 SECTION 4 Conclusion 18

SECTION 1 Convertibles an attractive investment!?

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 3 Attractive risk/return attributes Global convertibles hedged in EUR 1994 – 2007 * Internal calculations Past performance is no guarantee of future trends. Source: Datastream, Bloomberg, UBS. Data as of August 31, 2007.

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 4 But is the future always like the past? Unfortunately asset allocation is more complicated than that Nasdaq Composite Index Average return to March % p.a. Average return from March % p.a.

SECTION 2 The global convertible bond market

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 6 Global Convertible Bond Issuance Growing global issuance, but with mixed regional themes Source: UBS AG, MACE Advisors. Data as of August 31, 2007.

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 7 Global convertible bond universe size Source: UBS AG, MACE Advisors. Datas as of December 31, RegionUSD billionsNumber of convertible bonds US Europe Japan62351 Asia ex-Japan62555 Other24183 Total

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 8 Global convertible bond sectors Source: UBS AG, MACE Advisors, Datastream. Datas as of December 31, 2006.

SECTION 3 Will convertible bonds stay attractive?

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 10 Convertible bonds give exposure to…  Equity markets  Credit markets  Interest rates changes  Volatility changes Exposure to all these factors can also be taken on a stand alone basis The convertible bond asset class offers more than the sum of the above and has therefore a very attractive risk/reward profile But

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 11 Main performance drivers of convertible bonds Convertible bond Bond contentProspectus Correlation Equity content Issuance behaviour & valuation Duration exposure Credit exposure FX exposure Volatility exposure Equity exposure More than the sum of classical performance drivers

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 12 Equity markets versus convertible bond implied volatility* Source: UBS AG, MACE Advisors. Datas as of December 31, * We refer here to the European market, as the longest-running time series of average implied volatilities happens to be available for this particular market (as proxied by the UBS Convertible Bond Index). Average implied volatility Wealth Index /05/200019/08/200019/11/200019/02/200119/05/200119/08/200119/11/200119/02/ /05/200219/08/200219/11/200219/02/200319/05/200319/08/200319/11/200319/02/200419/05/200419/08/200419/11/200419/02/200519/05/ /08/200519/11/200519/02/200619/05/ /08/ /11/ UBS Convertible Bond Index - Eurozone (EUR) Average Implied Volatility (LHS)MSCI EMU (RHS)

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 13 Why convertible bonds cannot be replicated  Bond as exchange property  Better investor protection in comparison to traditional options  Optionality for companies where there is no liquid option market  Recurrent value added due to suboptimal call exercises by issuers

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 14 Cheap issuance Source: Lehman Brothers Datas as of December 31, Average cheapness of US convertible bond new issues 4,1 2,51 2,92 1,69 2,06 2,3 1,26 0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00 4, Percentage of cheapness

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 15 Cheap issuance Source: SDC, Datastream, Lehman Brothers, MACE Advisors, UBS AG. Datas as of December 31, New issuance as a percentage of market capitalization 0,8% 1,1% 1,4% 1,5% 2,4% 2,0% 1,7% 1,6% 10,9% 21,6% 18,1% 19,8% 17,8% 26,2% 32,8% 18,5% 26,6% 17,4% 0% 5% 10% 15% 20% 25% 30% 35% Issuance as a percentage of Market Capitalzation EquitiesConvertible Bonds

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 16 Benefits of high borrow cost Source: Bloomberg. Datas as of December 31, Theoretical value of General Motors $ for various levels of lending fees 17,35 17,16 16,99 16,83 16,69 16,00 16,20 16,40 16,60 16,80 17,00 17,20 17,40 17,60 17,80 18,00 1,0%2,0%3,0%4,0%5,0% Annual Stock Borrow Theoretical Value in USD

SECTION 4 Conclusion

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 18  Recurrent value added due to under-priced new issues  Recurrent value added due to suboptimal call exercises by issuers  Very good protection of optionality against corporate actions (takeover, dividends)  Optionality often priced with high stock borrow which favours outright investors (as else it wouldn’t work for hedge funds)  Exposure to correlation (the bond value is the exchange property)  Can not be replicated with other asset classes  Attractive risk/reward  Convertible arbitrage a very successful hedge fund strategy Conclusion Convertible bonds are an attractive asset class

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 19 Attractive convertible bonds… might be something for you?

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 20 Alain Eckmann, CFA  Alain Eckmann is a Senior Portfolio Manager within the Asymmetric Portfolio Solutions team. He is responsible worldwide for the convertible bond capability within UBS Global AM, which he helped to build up.  Alain joined the Asymmetric Portfolio Solutions team in His responsibilities included managing and enhancing the capabilities offered (capital preservations, currency overlay, Dynamic Alpha), and developing tailored client solutions.  During his studies, Alain worked for a private bank in Geneva, dealing with quantitative questions in asset management. After graduation, he built up a risk-management/risk- controlling department at Julius Baer in Zurich, developing mathematical methods to quantify market risks (VaR, etc).  Alain is co-author of the publications Exotic Options: A guide through the jungle of financial innovations, and The benefits of convertible bonds and is a regular speaker at international conferences. In addition, he is a member of the Swiss CFA Society and of the CFA Institute. Years of investment industry experience: 13 Education: University of Geneva (Switzerland), dipl. Senior Portfolio Manager Executive Director

International Investment Italian Forum – Milan, 8 th November 2007 This presentation is addressed to Institutional Clients only. It does not constitute an offering. This material is intended solely for training purposes and for the information of the person to whom it has been delivered. 21 Disclaimer For marketing and information purposes by UBS. The information above is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a reliable indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units. Commissions and costs have a negative impact on performance. If the currency of a financial product or financial service is different from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient. The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Past performance of investments (whether simulated or actual) is not necessarily a guide to future performance. All such information and opinions are subject to change without notice. UBS AG and / or other members of the UBS Group may have a position in and may make a purchase and / or sale of any of the securities or other financial instruments mentioned in this document. This document may not be reproduced, redistributed or republished for any purpose without the written permission of UBS. © UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. November 2007