1. Managing Strategic Foreign Exchange Risk September 23 rd , 2005 Campus Blairon, Turnhout

4. Behavior of strategic exposure (I) Strategic Exposure Profit Loss FX Rate Spot Is this really the pay-out when the cash flows materialize? In practice this might be totally different…..

5. Behavior of strategic exposure (II) Volumes might decrease if the FX rate increases, due to a decrease of the sales price in foreign currency…. Strategic Exposure Profit Loss FX Rate Spot

6. Behavior of strategic exposure (III) Strategic Exposure Profit Loss FX Rate Spot Loss might increase if the FX rate decreases, when you cannot increase the pricing of your product; loss of market share….

7. The strategic exposure Strategic Exposure Profit Loss FX Rate Spot

8. Use the characteristics of the exposure to create a hedge Strategic Exposure Profit Loss FX Rate Spot The hedge should have the opposite sensitivities…… Strategic Hedge

9. Use the characteristics of the exposure to create a hedge Strategic Exposure Profit Loss FX Rate Spot In order to create a no loss no profit situation Strategic Hedge

31. Example of Vega sensitivity USD Call / EUR Put option, strike At-the-money (Premiums in % of USD face amount) 0.275 1.655 1.380 6 – months 0.195 1.185 0.990 3 – months 0.055 0.330 0.275 1 – week Premium change (Vega) Premium at 6% Vol Premium at 5% Vol Maturity

40. Characteristics hedge Profit Loss FX Rate Long Exposure Strategic Hedge Net Result Result if no negative elasticity’s influence the anticipated exposure

41. Characteristics hedge Long Exposure Profit Loss FX Rate Result if elasticity’s turn against you Worse or worst case net Result Strategic Hedge

44. The Greeks at inception of the initial hedge Note: the Delta moves in favor if spot moves! -17,523,245 -16,029,401 -14,933,202 -14,497,786 -14,102,205 -13,309,031 -12,356,940 2% -16,906,977 -15,248,301 -14,091,828 -13,660,090 -13,279,583 -12,509,752 -11,532,711 1% -16,219,525 -14,345,281 -13,113,971 -12,693,428 -12,340,333 -11,612,577 -10,610,240 0% Volatility -15,446,876 -13,286,574 -11,959,801 -11,563,662 -11,258,786 -10,602,985 -9,577,412 -1% -14,569,867 -12,026,747 -10,574,267 -10,226,176 -10,005,623 -9,469,636 -8,428,696 -2% 5% 3% 1% 0% -1% -3% -5% CC2 Spot Delta

46. Result of exposure year 1 + long term hedge

48. In 2 months time the Greeks look like If spot does not move there is no time decay: Theta is positive! As a result the option value is increasing if spot does not move. -5,650 -5,306 -2,761 15,861 -2,890 -4,027 -2,710 Theta (€) 176,070 175,872 159,006 151,570 145,761 113,121 69,461 Vega (€) 1,005,888 1,004,753 444,606 -4,432,586 274,374 646,257 396,829 Gamma ($) -22,602,886 -15,121,156 -9,741,674 -12,211,357 -14,980,178 -10,722,447 -6,874,768 Delta ($) 1,663,058 1,101,426 781,117 709,560 605,850 203,879 -183,532 Premium (€) 10% 5% 1% 0% -1% -5% -10% spot move

49. In 2 months time the Greeks look like If spot does not move there is no time decay: Theta is positive! As a result the option value is increasing if spot does not move. Having a positive theta implies by definition that gamma is negative. -5,650 -5,306 -2,761 15,861 -2,890 -4,027 -2,710 Theta (€) 176,070 175,872 159,006 151,570 145,761 113,121 69,461 Vega (€) 1,005,888 1,004,753 444,606 -4,432,586 274,374 646,257 396,829 Gamma ($) -22,602,886 -15,121,156 -9,741,674 -12,211,357 -14,980,178 -10,722,447 -6,874,768 Delta ($) 1,663,058 1,101,426 781,117 709,560 605,850 203,879 -183,532 Premium (€) 10% 5% 1% 0% -1% -5% -10% spot move

50. In 2 months time the Greeks look like A negative gamma means that for these spot movements delta is moving against you. This is the reason why the initial hedge has a delta > USD 10mln -5,650 -5,306 -2,761 15,861 -2,890 -4,027 -2,710 Theta (€) 176,070 175,872 159,006 151,570 145,761 113,121 69,461 Vega (€) 1,005,888 1,004,753 444,606 -4,432,586 274,374 646,257 396,829 Gamma ($) -22,602,886 -15,121,156 -9,741,674 -12,211,357 -14,980,178 -10,722,447 -6,874,768 Delta ($) 1,663,058 1,101,426 781,117 709,560 605,850 203,879 -183,532 Premium (€) 10% 5% 1% 0% -1% -5% -10% spot move

51. In 2 months time the Greeks look like For bigger movements in spot gamma becomes positive, hedging your elasticity’s -5,650 -5,306 -2,761 15,861 -2,890 -4,027 -2,710 Theta (€) 176,070 175,872 159,006 151,570 145,761 113,121 69,461 Vega (€) 1,005,888 1,004,753 444,606 -4,432,586 274,374 646,257 396,829 Gamma ($) -22,602,886 -15,121,156 -9,741,674 -12,211,357 -14,980,178 -10,722,447 -6,874,768 Delta ($) 1,663,058 1,101,426 781,117 709,560 605,850 203,879 -183,532 Premium (€) 10% 5% 1% 0% -1% -5% -10% spot move

52. In 2 months time the Greeks look like When gamma is positive delta will move in your favor. If EUR/USD spot moves up with more than 1%, delta is increasing up to USD 50mln. So your hedged amount is increasing when spot moves against you. -5,650 -5,306 -2,761 15,861 -2,890 -4,027 -2,710 Theta (€) 176,070 175,872 159,006 151,570 145,761 113,121 69,461 Vega (€) 1,005,888 1,004,753 444,606 -4,432,586 274,374 646,257 396,829 Gamma ($) -22,602,886 -15,121,156 -9,741,674 -12,211,357 -14,980,178 -10,722,447 -6,874,768 Delta ($) 1,663,058 1,101,426 781,117 709,560 605,850 203,879 -183,532 Premium (€) 10% 5% 1% 0% -1% -5% -10% spot move

53. In 2 months time the Greeks look like When gamma is positive delta will move in your favor. If EUR/USD spot moves down with more than 1%, delta is decreasing, reducing your hedged amount. So your business profits from the increasing USD rate. -5,650 -5,306 -2,761 15,861 -2,890 -4,027 -2,710 Theta (€) 176,070 175,872 159,006 151,570 145,761 113,121 69,461 Vega (€) 1,005,888 1,004,753 444,606 -4,432,586 274,374 646,257 396,829 Gamma ($) -22,602,886 -15,121,156 -9,741,674 -12,211,357 -14,980,178 -10,722,447 -6,874,768 Delta ($) 1,663,058 1,101,426 781,117 709,560 605,850 203,879 -183,532 Premium (€) 10% 5% 1% 0% -1% -5% -10% spot move

54. Result of exposure year 1 + long term hedge

56. If USD moves up (= EUR/USD down) Profit Loss EUR/FC Initial hedge After Adjustment

57. If USD moves down (= EUR/USD up) Profit Loss EUR/FC Initial hedge After Adjustment