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

2. 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

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

4. 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

5. 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

6. Distribution of Annualized Earnings Outcomes

7. 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

8. h
For illustrative purposes only

9. h

10. For illustrative purposes onlyh

11. Earnings at Risk - what’s really at risk
= $750 million h
For illustrative purposes only

12. 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

13. Goals of Risk Management
Distribution after Risk Management
Inherent
Distribution
Earnings h

14. 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