RAMMSTEIN STEELHEDGING STRATEGIES FOR HEDGING STRATEGIES FOR EXPORTING TO THE UK

Adam Ferguson, Andreas Hjelde & Mike Monaghan

Recommendation and summaryy

Recommendation:Recommendation:Rammstein Steel should buy a synthetic long put to hedge the market view of down and highly volatile.hedge the market view of down and highly volatile.

Summary:Summary:Rammstein Steel has entered a long forward contract

with Rolls Royce 29 September 2008 with delivery with Rolls-Royce 29 September 2008 with delivery of high grade steel. Rammstein Steel will receive

GBP 100 mill 17 December 2008.GBP 100 mill 17 December 2008.

Contents

Company backgroundCompany backgroundProject definitionValue at RiskValue at RiskMarket dataFForecastsMarket outlookMap of alternativesHedging positions

Company backgroundp y g

Rammstein Steel is a successful steel producer Rammstein Steel is a successful steel producer specializing in steel manufacturing for the auto industry.yThe company has recently entered an agreement with Rolls-Royce in the UK.y29 September 2008 Rammstein Steel agreed with Rolls-Royce to receive a payment 17 December 2009.The amount is GBP 100 mill.

Project definitionj

Our current exposure is a long forward worth GBP 100 Our current exposure is a long forward worth GBP 100 mill in revenues which is due 17 December 2008. (+F)Future 17 December is 1.8132 USD/GBP/$ Underlying exposure is $181,320,000.Treasury department wants to reduce down side loss on y prevenue.Treasury department requires a maximum loss of 5% with a 5% probability (1.645 std dev).The risk limit is $9,066,000.

VaR for December

Today 9/29/08 Future price:1 8132

Monthly volatility: 3.55 Annual volatility: 12.631.8132

Risk limit -9,066,000 # Contractsunderlying: 62,500

Exposure: 1600 $ Underlying:181,320,000

# 6 6# SD VaR: 1.65 Adjustment -683 Keep: 917

Maturity date: 12/17/2008 79 days period Funding rate: 2% Risk premium: 1.5%

Monthly estimate Riskmetrics inferred

LowerPrice

1.7089 1.655050%

V@R Center and Confidence Interval

Price

Loss on position

-5,774,522 -9,066,000

Upper 1.9270 1.9993 1.6495 1.8171 2.00180%

10%

20%

30%

40%

1 30 1 40 1 50 1 60 1 70 1 80 1 90 2 00 2 10 2 20 2 30Upper price

1.9270 1.9993

Gain on position

6,301,581 10,669,752

1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00 2.10 2.20 2.30

Market data

Dec Options Strike Premium FV PremiumCall ATM 181 4.2 4.23Call OTM 185 2.85 2.87Put ATM 181 3.88 3.91Put OTM 177 2.31 2.33

Futures price: maturity 17 December 2008

1.8132

USD/GBP: Recent history and forecast/ y

USD/GBP ratioSource: Forecasts.org

Forecast II

Interest rate parity suggests further depreciation of Interest rate parity suggests further depreciation of the GBP to the USD

5

6

7

1 8000

1.8200

USD/GBP forward calculated

2

3

4

5

US interest rates

UK interest rates 1.7400

1.7600

1.7800

1.8000

USD/GBP forward

0

1

1.7000

1.7200

USD/GBP forward calculated

Source: Prof. Bodurtha’s Financial Services

Forecast III

BP Dec 2008 (BPZ8) Futures Prices, Implied Vols, 30-Day Historical Vols, 12/20/2008 Market-Based (RP) Forecasts and Riskmetric Monthly Vol (12.63% annualized) Likely Range , a/o 9/29/2008

Implied = 11.67

Expected Vol= 13.02

Historical 14.69

12 0

14.0

16.0

2.00

2.05

2.10Futures Price = 1.8132, RP = 1.5%, R = 2.0%, & Forecast = 1.8193Riskmetrics CP+ = 1.9251, 111 day Max = 2.0814 & Min = 1.8388Riskmetrics CP- = 1.7078, 111 Day Max = 1.8955 & Min = 1.6594

CP+=1.9251

8.0

10.0

12.0

1.90

1.95Volati

Pri

1.8955 & Min 1.6594

F=1.8132Expect ed Market

= 1.8193

4.0

6.0

1.75

1.80

1.85ility

ce

Likely

CP-=1.7078

0.0

2.0

1.65

1.70

y

Range

Market outlook and trends

EconomyThe UK economy is suffering from the recession so the Bankof England has decreased and will continue to decrease the interest rateThere is uncertainty about the world economy due to subprime mortgage woes and the rising current accountdeficit. As a consequence, Rammstein Steel expects high volatility on q , p g ythe GBP.

Recent signs of pound weaknessGBP near record low compared to US dollar.pBritish Pound has dropped well below $1.85 barrier.Bank of England reluctant to raise rates despite mild inflationary. fears.

Rammstein’s view

Direction Certainty

Down Unsure, ie high volatility

Rammstein’ view is in accordance with k t market consensus

Source: Yahoo Finance

Map of alternativesp

Level of confidence

Market view | Vol. view Low Stable High

Up X X Xp

Neutral X Alternative II: Synthetic short straddle

Alternative III: Longstraddle

Down X Alternative I: Forward RecommendedDown X Alternative I: Forward hedge

Recommendedposition: Synthetic long put itm

Hedging strategies: Current position g g g p

L S (L /Sh t) LL or S (Long/Short) LF, C, or P (Forward, Call, Put) FForward/Strike Price 1.8132 Price (C or P), 0.0 (F) - FV 0.00Number of Contracts 1600

Calculate 400.0000

600.0000

Long Forward Position

d Profit of a

Long Forward Position Total

Prices at 1.4832 -528.0000 -33,000,000.00Maturity 1.5382 -440.0000 -27,500,000.00

1.5932 -352.0000 -22,000,000.00

0.0000

200.0000

1.5932 352.0000 22,000,000.00Step size 1.6482 -264.0000 -16,500,000.00

0.055 1.7032 -176.0000 -11,000,000.001.7582 -88.0000 -5,500,000.00

Input futures price 1.8132 0.0000 0.001.8682 88.0000 5,500,000.00

Strike F9 1.9232 176.0000 11,000,000.00to update 1.9782 264.0000 16,500,000.00

-600.0000

-400.0000

-200.0000

1 4832 1 5932 1 7032 1 8132 1 9232 2 0332 2 1432p , ,2.0332 352.0000 22,000,000.002.0882 440.0000 27,500,000.002.1432 528.0000 33,000,000.00

@ Critical 1.6495 -261.9912 -16,374,450.22Prices 2.0018 301.7090 18,856,809.40

1.4832 1.5932 1.7032 1.8132 1.9232 2.0332 2.1432 Price at Contract Maturity

Recommended position: Synthetic long put itmput itm

L SCombined +1600F-1600F+3700P

P itiL or S (Long/Short) L S LF, C, or P F F P

Forward/Strike Price 1.8132 1.8132 1.8132

Price (C or P), 0 0 (F) FV 0 0000 0 0287 0 0391

600.0000800.0000

1000.00001200.0000

Position

0.0 (F) - FV 0.0000 0.0287 0.0391

Number of Contracts 1600 1600 3700

Calculated Profit of a

Combined +1600F-

1600F+3700 -400.0000-200.0000

0.0000200.0000400.0000

P Position

Prices at +1600F -1600F +3700P

+1600F-1600F+370

0P ProfitMaturity 1.4832 -528.0000 528.0000 1076.3300 1076.3300 67,270,625.0

1.5382 -440.0000 440.0000 872.8300 872.8300 54,551,875.0Step size 1.5932 -352.0000 352.0000 669.3300 669.3300 41,833,125.0

0.055 1.6482 -264.0000 264.0000 465.8300 465.8300 29,114,375.0

-800.0000-600.0000

00 0000

1 2 2 2 2 2 2Price at Contract Maturity

1.7032 -176.0000 176.0000 262.3300 262.3300 16,395,625.0Input 1.7582 -88.0000 88.0000 58.8300 58.8300 3,676,875.0

Futures=>1.813

2 0.0000 0.0000 -144.6700 -144.6700 -9,041,875.0Price 1.8682 88.0000 -88.0000 -144.6700 -144.6700 -9,041,875.0

1.9232 176.0000 -176.0000 -144.6700 -144.6700 -9,041,875.01.9782 264.0000 -264.0000 -144.6700 -144.6700 -9,041,875.0

2 0332 352 0000 -352 0000 -144 6700 -144 6700 -9 041 875 0

+1600F -1600F

Will gain on an estimated depreciation of 2.0332 352.0000 352.0000 144.6700 144.6700 9,041,875.0

2.0882 440.0000 -440.0000 -144.6700 -144.6700 -9,041,875.02.1432 528.0000 -528.0000 -144.6700 -144.6700 -9,041,875.0

@ Critical 1.6550 -253.0697 253.0697 440.5538 440.5538 27,534,611Prices 1.9993 297.8371 -297.8371 -144.6700 -144.6700 -9,041,875

the GBP, but will lose within risk limit on an appreciation

Alternative I: Forward hegdeg

L or S (Long/Short) L SF, C, or P (Forward, Call, Put) F FForward/Strike Price 1.8132 1.8100 Price (C or 400.0

600.0

Combined +1600F-698F Position

P), 0.0 (F) -FV 0.00 0.0000

Number of Contracts 1600 698

Calculated Profit

of aCombined +1600F

0.0

200.0

d +1600F-698F

Position

Prices at +1600F -698F+1600F-

698F Profit

Maturity 1.4832-528.0000 228.1064 -299.8936-

18,743,350.0

1.5382-440.0000 189.7164 -250.2836-

15,642,725.0

Step size 1 5932-352 0000 151 3264 -200 6736-

12 542 100 0-600.0

-400.0

-200.0

Step size 1.5932-352.0000 151.3264 -200.6736 12,542,100.00.055 1.6482-264.0000 112.9364 -151.0636 -9,441,475.0

1.7032-176.0000 74.5464 -101.4536 -6,340,850.0Input 1.7582 -88.0000 36.1564 -51.8436 -3,240,225.0

Futures=>1.813

2 0.0000 -2.2336 -2.2336 -139,600.0Price 1.8682 88.0000 -40.6236 47.3764 2,961,025.0

1.9232 176.0000 -79.0136 96.9864 6,061,650.01.9782 264.0000 -117.4036 146.5964 9,162,275.0

1.483 1.593 1.703 1.813 1.923 2.033 2.143Price at Contract Maturity

Will till l ti t d Strike F9 2.0332 352.0000 -155.7936 196.2064 12,262,900.0to update 2.0882 440.0000 -194.1836 245.8164 15,363,525.0

2.1432 528.0000 -232.5736 295.4264 18,464,150.0

@ Critical 1.6550-253.0697 108.1681 -144.9017 -9,056,354Prices 1.9993 297.8371 -132.1650 165.6721 10,354,505

Will still lose on an estimated downside, but gain on an upside.

Alternative II: Synthetic short straddley

L or S (Long/Sh Combined +1600F-3000C (Long/Short) L SF, C, or P (Forward,Call, Put) F CForward/Strike Price 1.8132 1.8100 Price (C or P), 0.0 200 0000

400.0000

600.0000

Position

o ), 0 0(F) - FV 0.0000 0.0423 Number of Contracts 1600 3200

Calculated Profit of aCombined

+1600F-3200C

-400.0000

-200.0000

0.0000

200.0000

3200C Position

Prices at +1600F -3200C+1600F-3200C Profit

Maturity 1.4832 -528.0000 135.3600 -392.6400 -24,540,0001.5382 -440.0000 135.3600 -304.6400 -19,040,000

Step size 1.5932 -352.0000 135.3600 -216.6400 -13,540,0000.055 1.6482 -264.0000 135.3600 -128.6400 -8,040,000

1.7032 -176.0000 135.3600 -40.6400 -2,540,000Input 1.7582 -88.0000 135.3600 47.3600 2,960,000

-1000.0000

-800.0000

-600.0000

1 2 2 2 2 2 2Input 1.7582 88.0000 135.3600 47.3600 2,960,000Futures=> 1.8132 0.0000 125.1200 125.1200 7,820,000

Price 1.8682 88.0000 -50.8800 37.1200 2,320,0001.9232 176.0000 -226.8800 -50.8800 -3,180,0001.9782 264.0000 -402.8800 -138.8800 -8,680,000

Strike F9 2.0332 352.0000 -578.8800 -226.8800 -14,180,000to update 2.0882 440.0000 -754.8800 -314.8800 -19,680,000

2.1432 528.0000 -930.8800 -402.8800 -25,180,000

@ Critical 1 6550 -253 0697 135 3600 -117 7097 -7 356 859

Price at Contract Maturity

Will not gain on high volatility, which is expected

@ Critical 1.6550 -253.0697 135.3600 -117.7097 -7,356,859Prices 1.9993 297.8371 -470.5543 -172.7171 -10,794,821

Alternative III: Long straddle g

L or S (Long/Short) L LF C or P Combined +1600F+3200P F, C, or P (Forward, Call, Put) F PForward/Strike Price 1.8132 1.8100 Price (C or P), 0.0 (F) -FV 0.0000 0.0391

Number of 600.0000

800.0000

1000.0000

Position

Number of Contracts 1600 3200

Calculated Profit of aCombined

+1600F+3200P Position

Prices at +1600F +3200P+1600F+

3200P ProfitMaturity 1.4832 -528.0000 920.5945 392.5945 24,537,157 -200.0000

0.0000

200.0000

400.0000

1.5382 -440.0000 744.5945 304.5945 19,037,157Step size 1.5932 -352.0000 568.5945 216.5945 13,537,157

0.055 1.6482 -264.0000 392.5945 128.5945 8,037,1571.7032 -176.0000 216.5945 40.5945 2,537,157

Input 1.7582 -88.0000 40.5945 -47.4055 -2,962,843

Futures=>1.813

2 0.0000 -125.1655 -125.1655 -7,822,843Price 1.8682 88.0000 -125.1655 -37.1655 -2,322,843

1.9232 176.0000 -125.1655 50.8345 3 177 157

-800.0000

-600.0000

-400.0000

00 0000

1 2 2 2 2 2 21.9232 176.0000 125.1655 50.8345 3,177,1571.9782 264.0000 -125.1655 138.8345 8,677,157

Strike F9 2.0332 352.0000 -125.1655 226.8345 14,177,157to update 2.0882 440.0000 -125.1655 314.8345 19,677,157

2.1432 528.0000 -125.1655 402.8345 25,177,157

@ Critical1.655

0 -253.0697 370.7340 117.6643 7,354,016

Prices1.999

3 297 8371 125 1655 172 6716 10 791 978

Price at Contract Maturity

Will gain on changes in the price Prices 3 297.8371 -125.1655 172.6716 10,791,978

Sum 18,145,994 either direction, but we will gain more with a synthetic long put

Recommendation and analysisy

Consistent with a market view that expects a Consistent with a market view that expects a depreciation of the British Pound and a highly volatile market; we recommend Rammstein Steel ;constructs a synthetic long put. It has a maximum downside risk of % 9.04 mill. That is within our loss limit.

Rammstein Steel Advisory Teamy