1. OVERVIEW ON RISK MANAGEMENT Jakarta, September 25, 2008

2. CORPORATE RISK Risk is the basis for opportunity Risk arises as a result of exposure Risk is not always possible or desirable to be eliminated  manage Risk

3. HOW DOES CORPORATE RISK ARISE ? Through countless transactions of financial nature like : Sales & Purchase Security Investments & Loans Legal transactions New projects M&A Debt financing The energy components of costs Through the activities of management, stakeholders, competitors, government or even weather

4. MAIN SOURCES OF FINANCIAL RISKS Financial risks arising from an organization’s exposure to changes in market prices, such as interest rates, exchange rates and commodity prices  MARKET RISK Financial risks arising from the actions of, and transactions with, other organizations such as vendors, customers, and counterparties in derivative transactions  CREDIT RISK Financial risks resulting from internal actions or failures of the organization, particularly people, processes and systems  OPERATIONAL RISK

5. WHY MANAGE RISK ? Theory : –Manage only systematic risk (beta risk), –No need to manage business specific risk –Perfect Capital Market Assumptions Practice : –Capital Market is not perfect –By managing risk variability in profitability is reduced, portraying good management skills –Volatile earnings higher tax rates –Stable cost, stable pricing policy  competitive advantage –Stability  stable cash flow  lower risk  lower COC

6. WHAT IS FINANCIAL RISK MANAGEMENT ? A process to deal with the uncertainties resulting from financial markets Involves assessing the financial risks facing an organization and developing management strategies consistent with internal priorities and policies. Addressing financial risks proactively  competitive advantage Agreement on key issues of risks

7. THE RISK MANAGEMENT PROCESS Identify Risk Exposures Measure & Estimate Risk Exposures Find Instruments & Facilities to shift or trade Risks Assess Costs & Benefits of Instruments Assess Effects of Exposures Form a Risk Mitigation Strategy Avoid Transfer Mitigate Keep Evaluate Performance

8. PROCESS OF FINANCIAL RISK MANAGEMENT Identify and prioritize key financial risks Determine an appropriate level of risk tolerance Implement risk management strategy in accordance with policy Measure, report, monitor and refine as needed.

9. MANAGING FINANCIAL RISKS  making organizational decisions about risks that are acceptable versus that are not  Passive strategy of taking no action is the acceptance of all risks by default  Risk usually do not exist in isolation, and the interaction of several exposures may have to be considered

10. ASSESSING FINANCIAL RISK Understanding the size of potential loss Estimating the probability of loss occurrence

11. ALTERNATIVES FOR MANAGING RISKS Do nothing and actively, or passively by default, accept all risks Hedge a portion of exposures by determining which exposures can be hedged Hedge all exposures possible

12. DIVERSIFICATION Tool in managing financial risks Diversification among investment assets  reduce risk of issuers failure Diversification of customers, suppliers and financing sources  reduce risk of external factors

13. RISK MANAGEMENT IS NOT A DEFENSIVE ACTIVITY A conservative company can take up significant risk, depending on : Its confidence in the way assessment & measurement of expected loss levels are done Accumulation of sufficient capital to protect against potential losses Deployment of risk management techniques to protect against potential losses Appropriate returns from the risky activities, once the cost of risk capital & management has been taken into account Clear communication with stakeholders about the company’s target risk profile

14. TYPOLOGY OF RISKS RISKS Market Risk Credit Risk Liquidity Risk Operational Risk Legal & Regulatory Risk Business Risk Strategic Risk Reputation Risk

15. TYPOLOGY OF FINANCIAL RISKS Financial Risk Equity Price Risk Interest Rate Risk Forex Risk Commodity Risk Transaction Risk Portfolio Concentration Counterparty Risk Issuer Risk Issue Risk Trading Risk Gap Risk Specific Risk General Market Risk Market Risk Credit Risk

16. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

17. FACTORS THAT AFFECT INTEREST RATES Expected levels of inflation General economic conditions Monetary policy and the stance of the central bank Foreign exchange market activity Foreign investor demand for debt outstanding Financial and political stability

18. SOURCE OF INTEREST RATE RISK Changes in the level of interest rates  Absolute Interest Rate Risk Changes in the shape of the yield curve  Yield Curve Risk Mismatches between exposure and the risk management strategies undertaken  Basis Risk Risk of availability of similar or better investment opportunities at the end of investment duration  Refunding Risk

19. ABSOLUTE INTEREST RATE RISK The possibility of change in interest rate The longer the duration, the higher the risk of interest rate change Can be hedged operationally or using instruments

20. YIELD CURVE RISK

21. BASIS RISK Unavailability of hedge instrument for specific needs Some knock out features incorporated in the hedge instrument

22. REFUNDING RISK Inability to forecast interest rate at maturity of a loan or investment Callable bonds Mismatch of investment duration vs financing duration

23. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

24. FOREIGN EXCHANGE RISK Transaction Risk –Risk impacting operational transaction Translation Risk –Risk impacting financial reports Economic Risk –Risk impacting company’s investment value

25. Should cy’s hedge operational as well as financial positions ? Firms should risk manage their operation  focuses the cy’s management on strategic issues Firms may hedge their assets & liabilities, as long as it is disclosed in the audited statements  pacify shareholders and focuses them on other strategic issues

26. MANAGING FOREX RISK Operational Hedging Instrumental Hedging Asset & Liability Hedging

27. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

28. FACTORS THAT AFFECT COMMODITY PRICES Expected levels of inflation, particularly for precious metal Interest rates Exchange rates, depending on how prices are determined General economic conditions Cost of production and ability to deliver to buyers Availability of substitutes and shifts in taste and consumption patterns Weather, particularly for agricultural commodities and energy Political stability, particularly for energy and precious metals

29. TYPES OF COMMODITY RISK Commodity Price Risk –Potential change in commodity price Commodity Quantity Risk –Potential change in demand & supply Commodity Basis Risk –Basis is difference between spot & future price –Potential change in basis Special Risks –Industry specific risk

30. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

31. EQUITY PRICE RISK Risk for companies who has equity investments or assets tied to equity prices

32. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

33. CREDIT RISK Default risk –Borrower is unwilling to repay Counterparty Pre-Settlement Risk –Unfavorable replacement contract Counterparty Settlement Risk (cross payments) –Counterparty fails the settlement process Sovereign or Country Risk –Risk in international transactions and movements of funds across borders Concentration risk –Credit exposure to concentrated sectors Legal Risk –The risk that the counterparty is not legally permitted to enter into transactions

34. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

35. OPERATIONAL RISK Taxation Risk Human Error and Fraud Processes and Procedural Risk Technology and Systems Risk Maintenance Risk Project Risk

36. PROJECT RISK Dynamic Risk : –Potential gain vs potential losses Inherent Risk –Nature of business Contingent Risk –Risk which cannot be directly controlled (external) Customer Risk Regulatory Risk Reputation/Damage Risk Organizational Risk Interpretation Risk

37. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

38. LIQUIDITY RISK Funding Liquidity Risk Asset Liquidity Risk

39. FUNDING LIQUIDITY RISK Insufficient liquidity to maintain day to day operation Financial capacity to meet short term obligation

40. ASSET LIQUIDITY RISK Company not able to execute a transaction at the prevailing market price e.g property sale If forced, might result in loss for company and reduce cy’s ability to hedge& manage market risk

41. MAJOR FINANCIAL RISKS Interest rate risk Foreign exchange risk Commodity price risk Credit risk Equity price risk Operational risk Liquidity risk Systemic risk

42. SYSTEMIC RISK The risk that the failure of an entity could trigger a domino effect and many subsequent organizational failures Difficult for an individual organization to mitigate Can also arise from technological failure or major disaster.

43. SYSTEMIC RISK Legal & regulatory Risk Business Risk e.g. choice of channel, positioning etc Strategic Risk : risk in a big strategic investment project e.g. JP Morgan acquiring Bear Stearns Brokerage Reputation Risk e.g. Adam Air