Value AR.ppt

7/27/2019 Value AR.ppt

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F inancial Risk Management:

An Earnings-at-Risk Approach

Daniel Montante

E.I . du Pont de Nemours & Company

December 6, 2000h


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h

Energy Feedstock #1

9%

Energy Feedstock #24%

Energy Feedstock #3

5%

Agriculture #1

2%

Agriculture #2

2%

Anticipated LocalCurrency Margins

46%

Floating Rate Debt

32%

Notional Amount at Risk

= $5 bil l ion

For il lustrative purposes only


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DuPont's Earnings-at-Risk (EaR) Approach

Our more quanti tative approach to corporate global r isk

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


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DuPont's Earnings-at-Risk (EaR) Approach

Our more quantitative approach to corporate global r iskmanagement . . .

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

Managementof Risk

Risk limits

Derivative contracts

Business strategy or tactics


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Distribution of Annualized Earnings Outcomes

0%

3%

5%

8%

10%

-2.

769447747

-2.

582828822

-2.

396209898

-2.

209590973

-2.

022972049

-1.

836353124

-1.6

497342

-1.

463115275

-1.

276496351

-1.

089877426

-0.

903258502

-0.

716639578

-0.

530020653

-0.

343401729

-0.

156782804

0

.02983612

0.

216455045

0.

403073969

0.

589692894

0.

776311818

0.

962930743

1.

149549667

1.

336168592

1.

522787516

1.

709406441

1.

896025365

2

.08264429

2.

269263214

2.

455882139

2.

642501063

2.

829119987

More

%Probabilit

y

.0%

25.0%

50.0%

75.0%

100.0%

Cumulative%

$100 MM

Budgeted Earnings

Equals the Earnings

at the 95% CI

$75 MM

$25 MM = EAR


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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 OutcomesPercent

Probability

25%

20%

15%

10%

5%

0%

Earnings

($ millions)

$300Equals the expected

or budgeted ATOI

$250Equals the earnings

corresponding to the

95% CI

What Does EaR Mean?


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EAR Summary by Month

0.00

50.00

100.00

150.00

200.00

250.00

300.00

January

Febr

uary

March

April

May

June Ju

ly

August

Septe

mber

Octob

er

Novemb

er

Decemb

er

Expected Earnings Earnings at Risk



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Earnings at Risk Contr ibution by SBU

Time Hori zon = 1 year

SBU #130%

SBU #2

20%

SBU #3

20%

SBU #4

10%

SBU #5

7%

SBU #6

7%

SBU #7

6%


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($100)

($50)

$0

$50

$100

$150

SBU

#1

SBU

#2

SBU

#3

SBU

#4

SBU

#5

SBU

#6

SBU

#7

DiversificationB

enefit

SBU EaR Hedge Effecti veness Comparison

Time Hori zon = 1-year

EaR - Natural EaR - With Hedging

For i ll ustrative purposes only


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h

Energy Feedstock #1

37%

Energy Feedstock #2

15%

Energy Feedstock #3

13%

Agriculture #1

2%

Agriculture #2

2%

Anticipated Local

Currency Margins

28%

Floating Rate Debt

3%

Earnings at Risk -whats really at risk

= $750 mil l ion



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Corporate-Wide & SBU Specif ic 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 onrisk 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 beestablished, e.g., business performance vs. hedge

results

Performance Evaluation: Performance can be

viewed on a risk return basis

Improved Communication: Clearcommunication 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


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Goals of Risk Management

Distr ibution after Risk Management

Inherent

Distribution

Earnings


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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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