Financial Risk Management: An EarningsatRisk Approach

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Financial Risk ManagementAn Earnings-at-Risk
Approach

• Daniel Montante
• E.I. du Pont de Nemours Company
• December 6, 2000

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Some Company Background

• Centralized Treasury
• FX Exposure in 40 Currencies
• 2 Billion Hedgeable Commodity Exposure
• 10 Billion Debt Portfolio
• Notable Portfolio Changes
• Conoco Divestiture
• energy subsidiary
• Pioneer Hi-Bred International Acquisition
• agricultural subsidiary

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Notional Amount at Risk 5 billion
For illustrative purposes only
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DuPont's Earnings-at-Risk (EaR) ApproachOur
more quantitative approach to corporate global
risk management . . .

• Earnings-at-Risk (EaR)
• Calculates the maximum loss on business and/or
  financial positions on a probability basis based
  on degrees of confidence
• Basically Revalue expected earnings with
  maximum potential earnings shortfall due to
  adverse market movements
• Monte Carlo simulation

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DuPont's Earnings-at-Risk (EaR) ApproachOur
more quantitative approach to corporate global
risk management . . .

• Earnings-at-Risk (EaR)
• Identification Data Collection of Cash Flows
  with an Associated Market Risk Factor
• Aggregation Quantification
• Measurisk - EaR Analysis
• Correlations Volatilities
• Portfolio approach - cross SBU
• Management of Risk
• Risk limits
• Derivative contracts
• Business strategy or tactics

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Distribution of Annualized Earnings Outcomes
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What Does EaR Mean?
Distribution of Annualized Earnings Outcomes

• A monthly EaR of 50 MM means On Average, one
  month in 20 you would expect a variance of 50 MM
  from (forecast) budget levels due to market
  movements
• Only 5 of the time would you anticipate
  exceeding your EaR

Percent Probability 25 20 15 10 5
0
300 Equals the expected or budgeted ATOI
250 Equals the earnings corresponding to the 95
CI
Earnings ( millions)
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For illustrative purposes only
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(No Transcript)
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For illustrative purposes only
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Earnings at Risk - whats really at risk 750
million
For illustrative purposes only
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Corporate-Wide SBU Specific Benefits of EaR
Methodology
Benefits to DuPont
Benefits to SBUs

• Clarity of Risk Exposures Improved clarity of
  exposures to enhance decision making
• Management of EPS Volatility Better manage
  earnings volatility to optimize shareholder value
• Senior Management Improvement Improved
  communication b/w senior management and the SBUs
• Performance Evaluation of Divisions Internal and
  external evaluation on a return on risk basis.

• Improved Risk Management within the SBUs Risk
  management expertise can be more readily applied
  to risk issues with the businesss
• Clear Accountability Consistency b/w decision
  making responsibility and results can be
  established, e.g., business performance vs. hedge
  results
• Performance Evaluation Performance can be viewed
  on a risk return basis
• Improved Communication Clear communication b/w
  SBUs, and treasury or commodity risk management,
  ensuring exposures are understood, and
  appropriate hedging strategies are put in place

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Goals of Risk Management
Distribution after Risk Management
Inherent Distribution
Earnings
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EaR Partnership

• Partnership with Measurisk.com
• Advisory Role
• Data Modeling Capability
• FAS 133
• WEB Application
• Input positions and perform risk analysis online
• Stress condition modeling