® TAL logo, the Bridge Design logo and "Invested Minds" are registered trademarks of TAL Global Asset Management Inc. © 2005 TAL Global Asset Management.

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® TAL logo, the Bridge Design logo and "Invested Minds" are registered trademarks of TAL Global Asset Management Inc. © 2005 TAL Global Asset Management Inc. All rights reserved. TAL Global Asset Management Inc. is a member of the CIBC Group of companies. Risk Management Case Study: Currency Option Overlay CCAD Québec presented to Maxime Tessier Vice President Currency Management 18 August 2005

Parameters of the problem Three phases of the overlay Performance conclusions

3 Parameters of the problem Underlying Manager Profile and Objective Underlying currency manager chooses long/short forward-based strategies. Investment horizon is three months, linear and 55% right (ex-ante). Stop-loss is set at one-third of the expected gain fixed from starting point. Stop-loss is continuous. Objectives: improve the return/risk ratio of this strategy with option overlay.

4 Case Study: Bullish Strategy on EUR/NOK Parameters of the problem

5 “Normal View” versus Manager’s “Actual View” Parameters of the problem A+B=55% 45%A B

6 Calculating the Actual Expected Payoff: 0,076% Parameters of the problem Manager is right (55%) Gross expected return 3% Manager is wrong (45%) Gross expected return 0% In first month, risk of 1% stop is 45%. In second month, it is 14%. In third month, it is 2% Over three months, the risk of 1% being touched is 87.8%. 12.2% x 0% 87.8% x –1% P x 3% = [(1-45%)*(1-14%)*(1-2%)] x 3% (1-P) x –1% = 53.6% x –1%.766% -.295% 0.000% -.395% Without a 1% stop, the actual expected payoff would be just over 1%

7 Note: it is assumed that the ex-ante upside distribution for the manager’s view does not exceed the historical distribution (I.e. view distribution is skewed) Viewing the Manager’s view and historical returns Three Phases of Overlay

8 EUR/NOK Historical Return Profile Three Phases of Overlay

9 Note: data based on annualized data using percent returns from end-month to end-month (WMRH data). EUR/NOK Historical Volatility Profile Three Phases of Overlay

10 Note: composite implied volatility quotes (Bloomberg data). Option Price Graph Three Phases of Overlay

Parameters of the problem Three phases of the overlay Performance conclusions

® TAL logo, the Bridge Design logo and "Invested Minds" are registered trademarks of TAL Global Asset Management Inc. © 2005 TAL Global Asset Management Inc. All rights reserved. TAL Global Asset Management Inc. is a member of the CIBC Group of companies. Risk Management Case Study: Currency Option Overlay CCAD Québec presented to Maxime Tessier Vice President Currency Management 18 August 2005