Financial Risk Management: An Earnings-at-Risk Approach Daniel Montante E.I. du Pont de Nemours & Company December 6, 2000 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 h
Notional Amount at Risk = $5 billion For illustrative purposes only 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 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 Variance/Covariance h
Distribution of Annualized Earnings Outcomes
Distribution of Annualized Earnings Outcomes 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% $250 Equals the earnings corresponding to the 95% CI $300 Equals the expected or budgeted ATOI Earnings ($ millions) h
h For illustrative purposes only
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For illustrative purposes only h
Earnings at Risk - what’s really at risk = $750 million h For illustrative purposes only
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 business’s 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 h
Goals of Risk Management Distribution after Risk Management Inherent Distribution Earnings h
h EaR Partnership Partnership with Measurisk.com WEB Application Advisory Role Data & Modeling Capability FAS 133 WEB Application Input positions and perform risk analysis online Stress condition modeling h