2006 NAST Treasury Management Conference Navigating the Flat Yield Curve:

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2006 NAST Treasury Management Conference
Navigating the Flat Yield Curve

• How to Reduce Risk and Otherwise Avoid Trouble

December 4, 2006
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All Debt and Derivatives Transactions Involve Risk

• Counterparty credit
• Market
• Valuation
• Opportunity Cost
• Basis
• Tax
• Regulatory
• Just saying NO does not in and of itself avoid
  risk

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Risk Premiums Are Currently Moderate to Low By
Historic Standards

• Market Volatility is at Lowest Level in 5 Years

• Credit Spreads are at Low Levels

Orange County
LTCM
Rate
Standard Deviation Daily Price
Spread (bps)
Lehman Swaption CBOE S P Index Options
Source Bloomberg
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Market Risks Are Difficult to Assess

• Muni and derivatives markets are not transparent
• Most public entities have sporadic involvement
• History is an imperfect guide
• Uncle Sam has an interest in tax-exempt bond
  related transactions

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Price Transparency Is Coming to the Muni Bond
Markets
Average 9.69
Standard Deviation 12.33
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Limited Price Transparency Exists in the Swap
Market
Distribution of Dealer Spreads on Interest Rate
Swaps 2006 YTD
Number of Occurrences
Spread to Mid Market (bps)
Source PFM Asset Management data
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History is an Imperfect Guide A CMS Swap in
Historical Context

• Assumptions
• 100MM Notional Amount
• 20-yr Bullet Maturity
• Constant Volatility
• Instantaneous Yield Curve Shift
• Mid-Market Levels

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Disclosure Statement

• This material is based on information obtained
  from sources generally believed to be reliable
  and available to the public, however PFM Asset
  Management LLC cannot guarantee its accuracy,
  completeness or suitability. This material is for
  general information purposes only and is not
  intended to provide specific advice or
  recommendation. All statements as to what will
  or may happen under certain circumstances are
  based on assumptions, some but not all of which
  ar noted in the presentation. Assumptions may or
  may not be proven correct as actual events occur,
  and results may depend on events outside of your
  or our control. Changes in assumptions may have a
  material effect on results. Past performance
  does necessarily reflect and is not a guaranty
  of future results. The information contained in
  this presentation is not an offer to purchase or
  sell any securities.