1.    Interest Rate Futures 21 November 2006

2. Outline of Presentation Managing Interest rate Risk Identifying market Expectations Using Charts Market Price Dynamics MosPrime

3. Concept of interest rate risk Fixing of the interest rate on an Asset or Liability What is my exposure? How do I measure it? => BPV

4. Instruments hedging short term interest rate risk Available instruments: -Cash instruments: Money Market and FX swaps -Non-cash Derivatives: OTC and Interest Rate Futures

5. Money Market Instruments: –Allow for the perfect interest rate hedge –Dates and notionals can be tailored –But, credit line intensive FX Swaps: –Exchange of notional between two currencies for the duration of the transaction –Allows for the perfect interest rate hedge in two currencies –Dates and notionals can be tailored –And use less credit lines than Money Market instruments. Cash instruments

6. Uneven swaps –T 0 –T 1 Even swaps –T 0 –T 1 Cash instruments: FX swaps Bank A Bank B Bank A Bank B USD Notional USD Notional + interest Bank ABank B Bank A Bank B USD Notional EUR Notional EUR Notional + (EUR interest – EUR equivalent of USD interest) EUR Notional EUR Notional + interest

7. Where derivative instruments are available, it is usually more efficient to separate cash and interest rate risk management: This allows to take the preferred hedging decision for each exposure. For example, it may be preferable to hedge a disbursement on a 3 month loan with overnight funding (Cash management) and a DERIVATIVE instrument (interest rate risk management). i.e. we can take a curve view Cash not always optimum to hedge the interest rate risk

8. Derivatives Over The Counter: Forward Rate Agreements (FRA) A FRA is an agreement about the future level of interest rates. Compensation is paid by one party to the other to the extent that on the interest fixing date, market interest rates deviate from the agreed rate.

9. Derivatives Benefits of FRAs: No cash involved (except at settlement): allows to separate cash management from interest rate risk management Dates and Notionals flexible (within limitations) => more flexible than Futures No basis risk (as opposed to Futures) Drawbacks of FRAs: Not perfect hedge (but if FRA dates close to those of the risk to be hedged, residual curve risk can be minimised) Credit risk ISDA legal agreement needed with every counterparty Pricing may not be transparent for non standard dates Legal and tax considerations in Russia?

10. Exchange traded derivatives: Interest rate futures prices are defined as 100 – Interbank offered rate. Derivatives

11. Exchange traded derivatives: –Benefits of Futures: No cash involved (except for margin): allows to separate cash management from interest rate risk management Counterparty is the Exchange + initial margin + daily margin calls => reduced credit risk Fewer Legal Agreements needed (with the Broker and Clearer only) Transparent pricing Brokerage fees cheaper than on OTC derivatives Fast and simple execution –Drawbacks of Futures: Not perfect hedge Basis risk with the cash risk (converging to 0 towards Future settlement date => no real risk if Futures held to settlement date) Derivatives

12. FRAs vs. Futures: In principle, a Forward and a Futures price have the same payoff Derivatives

13. FRAs vs. Futures: However, T he margining can create a price bias, if there is a non-zero correlation between moves in the asset (Futures) price and movements in the interest rates Margin in-flows need to be reinvested Margin calls out need to be funded The cash-settlement value of a FRA is discounted at the settlement price over the fixing period Derivatives

14. FRAs vs. Futures: the basis

15. Summary table of the different Instruments According to information provided to the EBRD by market participants In hard currenciesIn Russia (*) No Residual interest rate risk No Basis risk No Notional exchange Easy Executio n Transparent pricing Not Credit line intensive No legal issues No Tax issues Money market !!"! !, if standard dates ""! ! (in general) FX swap !!"! !, if standard dates "! ! (in general) NDF !!"! !, if standard dates """ FRA "!!! !, if standard dates !"" Futures ""!!!! !! ?Reduced?

16. Example: BPV impact of the different instruments BPV Book riskRisk implied by hedging instruments Maturity bucket Interest Rate 3 month 300 million loan to be hedged Money MarketFX SwapNDF Buy 1*4 FRA on 300mn starting on 11/12/6 Sell 300 Dec. Future settling on 18/12/06 1D5.28 1W5.30 1M5.32 -2,559-2,396 2M5.36 -748 3M5.37-7,7597,759 4M5.38 9,8038,022 5M 2,549 TOTAL -7,7597,759 7211 7,416 MM and FX swap imply a perfect hedge in BPV terms. However, BPV analysis ignores transaction costs, which can only be recovered by taking some risk. => no risk = no loss, but also no gain!

17. Example: BPV risk

18. Example: Scenario INPUTS Central Bank Rate Increases DateScen1Scen2Scen3 02-Nov-060.25 #### 07-Dec-060.0000 Forward (M) 3 04-Jan-070.25 0 Fwd Interval (M) 1 08-Feb-070.0000 01-Mar-070.2500 05-Apr-070.0000 EONIAEBFSSW1W Index3.36 03-May-070.0000 07-Jun-070.0000 05-Jul-070.0000 02-Aug-070.0000 06-Sep-070.0000 04-Oct-070.0000 01-Nov-070.0000 06-Dec-070.0000 03-Jan-080.0000 07-Feb-080.0000 06-Mar-080.0000 03-Apr-080.0000

19. Example: Scenario MARKETMODEL Contract Fut Dlv Dt FirstPx LastYld Ytm MidScen1Scen2Scen3 ERZ6 Comdty 18/12/200696.2803.72096.07696.12596.329 ERH7 Comdty 19/03/200796.1153.88595.81996.07196.323 ERM7 Comdty18/06/200796.0703.93095.83496.08696.339 ERU7 Comdty 17/09/200796.0703.93095.82996.08196.333 ERZ7 Comdty 17/12/200796.0853.91595.82796.07996.332 ERH8 Comdty 17/03/200896.1203.88095.82596.07796.329 ERM8 Comdty16/06/200896.1303.87095.82296.07596.327 ERU8 Comdty 15/09/200896.1353.86595.81996.07296.324 ERZ8 Comdty 15/12/200896.1153.88595.81696.06896.321 ERH9 Comdty 16/03/200996.1203.88095.81296.06596.317 ERM9 Comdty15/06/200996.1053.89595.80896.06196.313 ERU9 Comdty 14/09/200996.0903.91095.80496.05696.308 ERZ9 Comdty 14/12/200996.0703.93095.79996.05196.303 ERH0 Comdty 15/03/201096.0603.94095.79496.04696.298 ERM0 Comdty14/06/201096.0303.97095.78896.04096.293 ERU0 Comdty 13/09/201096.0103.99095.78296.03496.286 ERZ0 Comdty 13/12/201095.9754.02595.77596.02796.279

22. Heterogeneous expectations Speculators: critical to provision of liquidity A special kind of speculator: the Black Box What drives price action?

23. MosPrime: Origins In April 2005, a new Rouble money-market reference rate was launched in the Russian market - the Moscow Prime Offered Rate (MosPrime Rate) - under the auspices of the National Foreign Exchange Association (NFEA).

24. MosPrime: Description MosPrime is the yield for money-market time deposits offered by first tier banks in the Russian market to financial institutions of comparable credit standing. MosPrime is calculated daily for 1, 2, 3 and 6 month tenors provided by eight Contributor Banks. MosPrime calculation procedure is based on international standards: the arithmetic average of quoted rates after rejecting the highest and the lowest offers.

25. MosPrime: Contributing Banks A minimum of six banks contribute reference rates, and are selected on the basis of reputation, credit standing, scale of activity and experience in the Russian money-market. NFEA ’ s Board reviews the contributors ’ list at least once a year. There is no restriction on the recurring inclusion of a bank in the list. Currently the list of contributing banks consists of: ABN Amro Bank, ZAOCitibank, ZAO Gazprombank, CJSCInternational Moscow Bank, ZAO Raiffeisenbank Austria, ZAOSberbank, OJSC Bank for Foreign Trade (VTB), OJSC WestLB Vostok, ZAO

26. MosPrime: Bilateral Loans corporate and municipalEBRD has arranged RUB 30 billion of MosPrime-linked corporate and municipal loans. mortgage lendingMosPrime is used for long term mortgage lending, with one bank reporting 746 such loans in September 2006. internal benchmarkingMosPrime is used by a number of banks in their corporate loan programmes, as well as for internal benchmarking.

27. MosPrime: Bonds EBRD ’ s inaugural RUB bond (RUB 5bn 5yr), May 2005, was the first MosPrime-linked issue. To date, EBRD has issued three such RUB 5- year Floating Rate Notes totalling RUB 17.5 billion, for which a coupon will be set at 3 month MosPrime on every calendar month of the year.

28. MosPrime: Derivatives In May 2006 MosPrime-linked futures were launched on MICEX. Banks are quoting RUB interest rate swaps using MosPrime as the index for the floating leg. Expected legal changes, clarifying enforceability of swap transactions in Russian courts should expedite this activity, and allow the hedging of interest rate risk.

29. MosPrime: Additional Information NFEA undertakes to disclose MosPrime on a daily basis via its website, special Reuters pages and mass media. http://www.nva.ruhttp://www.nva.ru Contributor Banks undertake to lend to the other panel banks at their MosPrime quotation rate, and to accept deposits from them at no more than 50 basis points below that rate. Contributor Bank ’ s have agreed to lend to EBRD at their MosPrime quotation rate and accept deposits at no more than 50 basis points below it on the dates of bond coupon fixings. EBRD tests the validity of the rates quoted, and monitors the panel of Contributor Banks to ensure the credibility of the MosPrime rate.

30. MosPrime: Additional Information Mosprime quotations for 0/n, 1 week, 2 weeks will be officially launched in January 2007 Technical start date 15 December 2006