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Financial Risk Management: An Earnings-at-Risk Approach Daniel Montante E.I. du Pont de Nemours & Company December 6, 2000 h.

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Presentation on theme: "Financial Risk Management: An Earnings-at-Risk Approach Daniel Montante E.I. du Pont de Nemours & Company December 6, 2000 h."— Presentation transcript:

1 Financial Risk Management: An Earnings-at-Risk Approach Daniel Montante E.I. du Pont de Nemours & Company December 6, 2000 h

2 h 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

3 h Notional Amount at Risk = $5 billion For illustrative purposes only

4 h DuPont's Earnings-at-Risk (EaR) Approach Our 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

5 h DuPont's Earnings-at-Risk (EaR) Approach Our 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

6 Distribution of Annualized Earnings Outcomes

7 h A monthly EaR of $50 MM means: On Average, one month in 20 you would expect a variance of $50 MM from (forecast) budget levels due to market movements Only 5% of the time would you anticipate exceeding your EaR Distribution of Annualized Earnings Outcomes Percent Probability 25% 20% 15% 10% 5% 0% Earnings ($ millions) $300 Equals the expected or budgeted ATOI $250 Equals the earnings corresponding to the 95% CI What Does EaR Mean?

8 h For illustrative purposes only

9 h

10 h

11 h Earnings at Risk - whats really at risk = $750 million For illustrative purposes only

12 h Corporate-Wide & SBU Specific Benefits of EaR Methodology 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 Benefits to DuPont Benefits to SBUs

13 h Goals of Risk Management Distribution after Risk Management InherentDistribution Earnings

14 h 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


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