Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 1 Jim Dull, CFA Financial Advisor Jeremy Shevlin, CFP Financial Advisor Concentrated Position Risk Management University of Colorado at Boulder Finance 4040 – Derivatives Tuesday, April 18, 2006

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 2 Table of Contents I.Introduction to Crestone Capital Advisors LLC II.Concentrated Position Risk Management III.Zero-Premium Collar Example IV.Variable Pre-Paid Forward Example V.OTC vs. Exchange-Traded Options VI.Hedging Constraints VII.Derivatives Exchanges VIII.Question & Answer Session

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 3 I. Introduction to Crestone Capital Advisors LLC Crestone Capital Advisors LLC (“Crestone”), based in Boulder, Colorado, is an independent wealth management firm for high net worth individuals, families, and foundations. Our services include investment management, concentrated position risk management, estate and philanthropic planning, and income tax planning and reporting.

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 4 II. Concentrated Position Risk Management Preserve / protect wealth Provide liquidity for diversification Limit equity risk exposure Defer capital gains taxes Reasons to Hedge:

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 5 II. Concentrated Position Risk Management (cont’d) Benefits Considerations

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 6 III. Zero-Premium Collar Example Zero-Premium Collar Description Most common exchange-traded hedging/ monetization transaction Standardized contracts American-style options Tax deferral strategy Creates downside floor and allows for upside participation Possible up-front liquidity via margin loan

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 7 III. Zero-Premium Collar Example (cont’d) ABC, Inc. – 5 Year Price Chart A B

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 8 III. Zero-Premium Collar Example (cont’d) Call Strike = $30 Initial Price = $25 Upside Capped Investor does not participate in upside stock price appreciation above $30. Downside Exposed Investor has no downside protection other than premium received. At maturity, if the final price of ABC stock is $30 or lower, the call expires without value. Long Put Short Call Investor retains first $5 of stock price appreciation. A In early 2002, an investor that owns 100,000 shares of ABC stock executes 1,000 Jan 2003 $20 put, $30 call collars for even money (covering all 100,000 ABC shares) when ABC stock is trading for $25/share. Upside Participation Investor retains 100% of upside stock price appreciation less premium paid. Downside Protected Investor has downside protection at $20 and below. Investor exposed to first $5 of stock price depreciation. Put Strike = $20 At maturity, if the final price of ABC stock is $20 or higher, the put expires without value. of ABC stock

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 9 Upside Capped Investor does not participate in upside stock price appreciation above $30. Downside Protected Investor has downside protection at $20 and below. Call Strike = $30 Initial Price = $25 Put Strike = $20 At maturity, if the final price of ABC stock is at or between $20 and $30, both the call and put options expire without value. Investor retains first $5 of stock price appreciation… And is exposed to first $(y-x) of depreciation. III. Zero-Premium Collar Example (cont’d) And is exposed to first $5 of stock price depreciation. Zero-Premium Collar of ABC stock

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 10 III. Zero-Premium Collar Example (cont’d) ABC, Inc. – 5 Year Price Chart A B

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 11 III. Zero-Premium Collar Example (cont’d) B In September 2002, the same investor exits 1,000 Jan 2003 $20 put, $30 call collars for $10 per contract (covering 100,000 ABC shares) when ABC stock is trading for $10/share and retains his 100,000 long ABC shares. Put Sale Intrinsic value = $10.00 Time Value = $0.00 Call Buy Intrinsic value = $0.00 Time Value = $0.05 Total Gain on Hedge: $995,000 * Note that the investor retained his long stock position but incurred an unrealized loss of $1,500,000 1,000 contracts x $9.95/contract x 100 multiplier =

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 12 IV. Variable Pre-Paid Forward Example Variable Pre-Paid Forward Description Most common OTC hedging/monetization transaction Fully customizable contracts Most likely European-style options Tax deferral strategy Creates downside floor and allows for upside participation Significant up-front liquidity inherent in structure

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 13 IV. Variable Pre-Paid Forward Example (cont’d) Upper Strike = $30 Lower Strike = $25 Advance = $21 MaturityTrade Date Three Years Investor retains up to $5 of appreciation In early 2002, an investor that owns 100,000 shares of ABC stock enters into a 3 year VPF contract when ABC stock is trading for $25/share. The VPF is structured with a minimum price/share value of 100% ($25/share), maximum price/share value of 120% ($30/share), and a cash advance of 84% ($21/share). Investor is fully protected below $25, less implied financing costs (Investor receives $2.1M upfront)

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 14 IV. Variable Pre-Paid Forward Example (cont’d) ABC, Inc. – 5 Year Price Chart A B

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 15 IV. Variable Pre-Paid Forward Example (cont’d) In early 2005, the price of ABC is $12 and the investor settles the trade by delivering 100,000 shares of ABC stock to the counterparty. Had the investor remained un-hedged over the 3 year period and held the long position, she would have lost the benefit of investing the $2.1M cash advance and would now only have $1.2M worth of ABC stock.

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 16 V. OTC vs. Exchange-Traded Options OTC Customized Counterparty risk More expensive Largely unregulated Privately negotiated Less liquid Exchange-Traded Standardized No counterparty risk Less expensive Regulated Publicly traded More liquid

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 17 VI. Hedging Constraints Regulatory Rule 144 Section 16(b) Margin requirements Trading windows Practical/Operational Liquidity Marginability of shares Float (borrow) Behavioral constraints

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 18 VII. Derivatives Exchanges Futures Exchanges: Chicago Mercantile Exchange (CME) Chicago Board of Trade (CBOT) New York Mercantile Exchange (NYMEX) Equity Option Exchanges: Chicago Board Options Exchange (CBOE) American Stock and Options Exchange (AMEX) Philadelphia Stock Exchange (PHLX) Boston Options Exchange (BOX) International Securities Exchange (ISE)

Securities offered through Crestone Securities LLC, Member NASD - SIPC; Investment Advisory Services offered through Crestone Asset Management LLC, Registered Investment Advisor. 19 VIII. Question & Answer Session