Risk Sample Issue

8/2/2019 Risk Sample Issue

1/10

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Erpean Aernac

Deence and Space C.NV, te part-wner f air-craft cmpan Ars SAS,is pressing its clients t pafr aircraft in eurs ratertan dllars, a mve tatreflects te tuger envirn-ment fr dllar financingand edging.

Te cmpan is seek-ing t reduce its dllar-denminated expsure bswitcing te currenc f itscntracts wit airlines inteurs, Hans Peer Rn, cief financialfficer f EADS, said n a Nv. 10 earn-ings call.

In additin t ur traditinal edgingactivit, cntracting wit several airlinesin eur is prgressing, Ring said nte call. Weve talked abut tat befreand we can cnfirm nw tat we aremving int te rigt directin ere.

Te mve is an attempt t mve awafrm te tpical practice f mst aircraft

in dllars. EADS as a $71.8 billinprtfli f freign currenc edges inplace t manage its expsure t dllarstrug suc cntracts.

Te cmpan as been increasing itsuse f ptins rater tan frwards t in-crease its edging capacit wit banks,and a mve int eur cntracts wuldelp t manage its dllar expsure.Man Eurpean airlines ave t edgeteir Eurpean expsure, after securing

11.25.11

BRIEF

Rknews & analysis on poRtfolios, funding

and hedging stRategies

EADS Boosts FX Hedges, Pans Currenc Change

AViVA iSSuES boND AftER ANNuity SHoRtfAll. Te U.K.insurers unsceduled $400 millin bnd will elp sre up regula-tr capital after a decline in bnd ields. (page 2)

itAliAN iNSuRERS fACE CAPitAl PRESSuRES, DowN-gRADES oN SoVEREigN RiSk. Te tree largest Italian insurance cmpanies sa telst a cmbined 5.5 billin eurs ($7.34 billin) in capital in te first nine mnts f tisear. (page 3)

VolAtility wAtCH. Banks benefited frm Italian svereign credit-default swap edges

against ptential writedwns. Sugar price declines prmpted edging increases. (page 5).RiSk iNSigHt. Adam Litke n te Vlcker Rules remaining lples and implementa-tin difficulties. (page 6)

CDS iNDiCAtoRS. Cre EU svereigns including German were te wrst perfrmerstis week, alng wit German and Austrian banks and Frenc nn-financials. (page 7)

iN CoNVERSAtioN. PenSams Andersen n edging fr tail-risk and te separatin falpa and beta. (page 10)

By RADI KhASAWNEh

RISKRoUNDUP

RISK INDICATORS

Foreign Exchange Value YTD chg/%

EURUSD 1.33 -0.57

USDJPY 77.35 4.87

GBPUSD 1.55 -0.83

Equity Indices

S&P500 1,162 -7.62

Nikkei 8,160 -20.23Estoxx 50 2,101 -24.78

FTSE100 5,120 -13.22

Money Markets

Eonia 0.72 -12.00

Euribor 1.47 46.52

USD Libor 0.51 68.97

UK Libor 1.03 35.91

Interest Rate Swaps

10yr USD swap 2.15 -36.53

10yr EUR swap 2.66 -19.15

10yr JPY swap 1.03 -11.14

10yr GBP swap 2.45 -30.82

Government Bonds

10yr US Treasury 1.94 -41.01

10yr Germany 2.18 -26.49

10yr JGB 1.00 -11.36

10yr Gilt 2.18 -35.75

Interest rate options

10-20yr USD swaption 31.92 77.98

10-20yr EUR swaption 24.15 37.22

10-20yr GBP swaption 18.14 39.32

Credit Indices

iTraxx Europe 214.80 104.51Sovx Europe 380.55 81.38

CDX NA 135.80 59.77

Volatility

VIX 33.98 91.44

VSTOXX 40.32 68.61

Commodities

Oil 96.29 5.37

Gold 1,685 18.61

-160

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-20

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0

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24/08/2009 24/02/2010 24/08/2010 24/02/2011 24/08/2011

Volatility(percent)Basispoints

Option Vol, Basis Swaps Increase Dollar Costs

Euro/dollar 3m ATM Vol

(LHS)

3 month Euro/dollar basis

swap (RHS)

continued on next page


2/10

11.25.11 Bloomberg Brief | Risk 2

1 2 3 4 5 6 7 8 9 10

Aias Unexpected Bond Addresses Annuit ShortaU.K. insurer Avva Pc.s failure t edge sufficientl against a plunge in U.S. bnd

ields likel prmpted te cmpan t issue an unexpected $400 millin bnd tatsres up regulatr capital eld against annuit plicies it sld t U.S. custmers.

Te bnd issue ma elp pa fr an increase in te cmpans regulatr prvisinsfr index-linked annuit plicies tat ffer a capital guarantee. Tat increase wuld be

215 millin punds ($333 millin), accrding t Blmberg estimates based n sen-sitivities publised in its 2010 annual reprt and ear-t-date declines in te 10-eardllar swap rate.

Aviva first annunced a $200 millin subrdinated bnd befre dubling its size atpricing n Nv. 14. Te 30-ear bnds paid a cupn f 8.25 percent, wic ratingscmpan Mds invesrs Servce nted was a iger cst f financing tan te800 millin-eur subrdinated bnd it ad called earlier in te week. Tse bndspaid investrs a cupn f 5.75 percent, accrding t a Mds ratings annunce-ment fr te new bnd.

We are surprised b te anticipated cupn f 8.25 percent t 8.5 percent, wicseems ver ig fr an AA-range issuer, CredShs ld. said in a reprt publisedn Nv. 16. Tis iger rate peraps reflects te unexpected nature f tis issuanceand te need t d s n srt ntice.

Aviva ad 20 billin punds f liabilities linked t its U.S. index-linked plicies at te

end f last ear. Since ten, it as 2 billin punds f te plicies, accrding t tird-quarter results. Aviva edges te interest pament fr its index-linked annuit plicieswit derivatives, wic pa interest based mainl n te Sandard & Prs 500Cmpsite Index.

Te cmpan didnt disclse canges t statutr capital fr its annuit businessin its tird-quarter results. It sells te plicies trug its U.S. subsidiar, Aviva USA,based in Iwa.

Te bnds wuld be used fr general crprate purpses and te prceeds wuldcunt fr regulatr capital purpses, te cmpan said in a statement n its website,witut giving furter details.

Radi Khasawneh

NEwS

eads boosts fx hedges...

aircraft financing denminated in dllars.Frenc banks, wic ave a 20 percent

sare f tis market, ave annunced tatte are exiting businesses suc as air-craft financing after seeing large declinesin te availabilit f dllar funding.

Tw f EADSs largest rders fr aircraftin Eurpe were frm Ar france-klMgrp and Desche lhansa Ag.In te tird quarter, Air France signeda cmmitment fr 60 A350 planes frmEADS, and Luftansa placed rders andcmmitments fr 30 A320 and tw A380planes, accrding t EADS results.

Aircraft financing leases ften invlve alevel f participatin r subsequent lend-ing b te bank. Accrding t Luftansas

annual reprt, te leases fr te twA380 planes invlve a c-investmentfrm te bank. Te cmpan entersint edges fr 50 percent f te cur-

renc risk wen te cntract is signed,and builds tat up ver time, depending

n te prevailing excange rate. At teend f last ear, Luftansa ad edgedmre tan 80 percent f its pamentsdue under financing agreements, wicttal $5.49 billin eurs, accrding t itsannual reprt publised n Marc 17.Luftansa declined t cmment n itscntracts wit Airbus, citing cnfidential-it agreements.

Phppe Caava, cief financial fficerf Air France, estimated tat te airlineuses Frenc banks fr 13 percent f itsfinancing, and said tat te envirnmentad becme mre difficult.

Tere are alternatives tat can be

drawn upn, even tug its never agd sign fr us t see te number fplaers prviding financing is diminis-ing, Calavia said n a Nv. 11 tird-

quarter earnings call.Air France as 1.9 billin eurs f

dllar-denminated cmmitments frfligt equipment due ver te next furears, wic it edges n a rlling24-mnt basis, accrding t tird-quarter results filed n Nv. 9. At teend f last ear, te cmpan ad $744millin in currenc edges in place fr2011, wic represented 91 percent fits aircraft cmmitments. Te cmpansaid it cnverted te dllar amunts inteurs trug swaps n te clsing datef agreements.

EADS increased its freign excangeedges b $1.6 billin ver te first ninemnts f te ear. Te cmpan as

increased its use f ptin cllars b$1 billin in an effrt t reduce its cstf edging, accrding t a presentatingiven t analsts n Nv. 10.

bmer bre Rs

Neseer Ted MerzExecve Edr [email protected]

212-617-2309

Rs Edr Nick [email protected]+44-20-3216-4818

Reprer Radi [email protected]+44-20-7673-2763

technca Albert FuertesEdr [email protected]

+44-20-3525-8364

Neseer Nick Ferrisbsness Manaer [email protected]

212-617-6975

Adversn [email protected]

Reprns & Lri HustedPermssns [email protected]

717-505-9701

T subscribe via the Blmber Prfessinal Terminaltype BRIEF r n the web at:www.Blmber.cm/brief/risk

2011 Blmber LP. All rihts reserved.

This newsletter and its cntents may nt be frwardedr redistributed withut the prir cnsent f Blmber.Please cntact ur reprints and permissins ruplisted abve fr mre infrmatin.

continued from previous page


3/10


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4/10


1 2 3 4 5 6 7 8 9 10

News...

Itaian Insurers Face Capita Pressure, DongradesTe tree largest Italian insurance cmpanies sa te lst a cmbined 4.3 billin eurs

($5.7 billin) in capital in te first nine mnts f tis ear after cming under pressure be-cause f declines in Italian gvernment bnd prices and equit markets. fndara-SAi SpAwas frced t raise capital and was subsequentl dwngraded t junk status, wile te largestinsurer Asscrazn genera SpA said it was seeking regulatr relief and is facing a likeldwngrade, accrding t analsts.

Generali, te largest Italian gvernment lder amng te insurers, suffered a 6.1 billineur decline in its value based n its wn embedded-value calculatin in te tird quarter,accrding t tird-quarter results filed n Nv. 11. A subsequent decline in Italian gvernmentbnd prices as caused a furter 1 billin-eur decline in its embedded value, accrding tan earnings call. Tat in turn as reduced te cmpans ecnmic slvenc rati wicincludes te effect f market mves t 120 percent frm 126 percent between te end f tetird quarter and te call.

Te main issue wit Generali is tat it is relativel undercapitalized and will eventuall avet deal wit tat, said CredShs ld. analst Phppe Pcane in a Nv. 13 reprt. A

lt as appened since te end f September, and wit declines in Italian gvernment bndprices te slvenc rati can nl deterirate.Picagne frecast tat te cmpan will be dwngraded as a result. It is currentl rated AA-

b Sandard & Prs and fch Rans, wit a negative utlk.Te reductin in its capital as meant te cmpan is seeking canges t te wa te

existing slvenc regulatins are applied in Ital, particularl in te carge applied tavailable-fr-sale real estate assets, Cief Financial officer Raaee Ars sad n a Nv.11 earnings call.

Italian gvernment bnds enj a zer risk-weigting under bt te Slvenc I regulatinsand te prpsed Slvenc II regulatins, wic are set t cme int frce in 2014. Te Eur-pean Cmmissin is reviewing te presumptin f a zer risk-weigting n gvernment bndsissued b members f te organisatin fr Ecnmic C-peratin & Develpment, accrd-ing t Mche barner, cmmissiner in carge f internal markets regulatin, in a speecgiven in Berlin n Nv. 18.

Generali wuld need an extra 5 billin eurs f capital in te event tat Slvenc II rules

were canged t reflect te same carges fr crprate bnds utlined in te latest quantita-tive impact stud, accrding t Blmberg estimates based n a 9.8 percent capital carge.Te carge is calculated n Generalis 51.9 billin-eur prtfli f Italian gvernment bndstat ave an average duratin f seven ears. B cntrast, Itals secnd-biggest insurerMedanm SpA wuld nl need 164.5 millin f additinal capital n its 4.7 billin-eurprtfli f Italian gvernment bnds because f te muc srter duratin f its prtfli.

Fndiaria raised 800 millin eurs f capital during te tird quarter, befre being dwn-graded t junk status b Standard & Prs n te cmpans increasingl cnstrainedcapital adequac and slvenc psitin, te ratings cmpan said in a Nv. 15 rating reprt.Fndiaria as a slvenc I rati f 111 percent after falling belw 100 percent t 97.4 percent atte end f te last ear. Te capital raising was intended t bring up tat number t mre tan125 percent. Te rati as been affected b declines in gvernment bnd prices and equitmarkets, te cmpan said in tird quarter results n Nv. 10. Te cmpan is currentl ratedBB+ b Standard & Prs and Fitc.

Te cmpan will take actin in te srtest perid pssible t restre its slvenc margint 120 percent, it said in a statement n its website publised n Nv. 15.Net expsure t Italian gvernment bnds as a percentage f sarelder equit is pr-

nunced fr all tree insurers, wit Italian insurance cmpanies te mst leveraged t teirwn gvernment debt amng Sutern Eurpean cuntries, accrding t figures publisedb barcas Capa in September. Generali was te lwest amng te fur, wit net Italiangvernment bnd expsure accunting fr 65 percent f sarelder equit.

Radi Khasawneh

Crrecn n as ees sse: In urfrnt-page str, te name f Italian bankUnine di Banci Italiane SpA was mis-spelled,and Allianz SEs Cief Financial officer oliverBeate was incrrectl described as being tecief risk fficer.

RbSs bsc Decdes Sa n as Rs Che

Nahan bsc, Ra ban Scand grp Pcs cief risk f-ficer, tis week reversed an earlierdecisin t leave te bank.

Bstck ad been due t jin ldsbann grp Pc as ead fwlesale banking in a mve an-nunced n Jul 19. he jined RBSfrm Ae Nana Pc in June2009 as ead f restructuring and risk,wit respnsibilit fr managing assetsales and te U.K. Asset PrtectinSceme prtfli.

After careful cnsideratin f is p-

sitin Natan as decided t remain inis current rle as cief risk fficer atRBS, a regulatr filing frm te bankn Nv. 21 said.

ANZ Prmes wams Che Rs ocer

Ne wams as been appintedcief risk fficer at Asraa & NeZeaand bann grp ld., Aus-tralias tird largest bank b marketvalue, accrding t a Nv. 17 filing witte Australian Stck Excange.

Williams will replace Chrs Pae,w will retire after tree ears in terle n Dec. 16, accrding t a pressrelease frm te bank.

Williams as been a managing direc-tr in carge f ANZs Australian insti-tutins business since 2008, wen emved t Australia frm New Zealand.he jined te bank in 2004, wenANZ bugt Nana ban NeZeaand frm lds tSb grp.

Williams will reprt t Cief Execu-tive officer Me Smh.

ON THE MOvE

For Web News on Hedge Managers on Bloomberg click {STNI HEDGEMANAGERSWEB }


5/10


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vOlATIlITy wATCH By ALBERTo FUERTES

Bans Beneft rom Itaian

Soereign CDS HedgesBanks tat reprted ldings f Italian

svereign debt credit-default swaps aveprfited frm mark-t-market increases inte value f te cntracts in te secndalf f te ear, especiall in te tirdquarter. Tse edges cunterbalance p-tential writedwns n te banks expsuret svereign Italian bnds and lans.

Desche ban Ag as ad a gain f$507 millin since June, assuming tat tentinal value f te Italian CDS eld didnt cange in eac quarter and te cn-tracts ad a five-ear maturit, accrding

t Blmberg Brief estimates. Under tesame assumptins, te gains fr ubS Agand ban Amerca Crp. were $340millin and $183 millin respectivel.

UBSs net ntinal psitin increasedfrm 1.9 billin Swiss francs ($2 billin)

Declines in sugar prices ave prmpted cmpanies suc asHeenc Cca-Ca bn Cmpan S.A. t start edgingte cmmdit after a perid f vlatilit and rising csts. Sugarspt prices ave fallen 12 percent since Jul and te futures curveindicates small price declines are expected in te future.

hellenics new edging plic is designed t manage expsuret sugar-price vlatilit, accrding t te cmpans quarterl

reprt. hellenic previusl relied n building inventries andfixed-price cntracts t manage risk. Te cmpan ad a 0.6millin-eur gain n te new derivatives in te tird quarter andstill predicts its input csts will increase in 2012, accrding t acmpan earnings call.

Cmpanha de bedas das Amercas (AmBev), Brazils larg-est beer cmpan, als reprted gains n its sugar edges in tetird quarter. AmBev ad a 0.3 millin-real ($170,000) gain frmits edges in te tird quarter. B cntrast, te cmpan lst13.3 millin real in te same quarter last ear.

Cpper mining cmpanies reprted edging gains during te tirdquarter and plan t extend te maturit f teir edging prtflis

after a 29 percent decline in prices in August and September. Tecpper spt price increased 4 percent since te beginning f oct-ber. Futures data sw traders d nt anticipate canges in cpperprices in te cming mnts.

tase Mnes ld. reprted a $48 millin gain n cpper deriva-tives in te tird quarter and said it will extend its cpper price pr-tectin prgram int 2013, accrding t an earnings call. ShernCpper Crp. reprted a $20.7 millin gain due t its cpperedges in te tird quarter and will maintain its edging psitin inte furt quarter and te first quarter f next ear.

Faing Sugar Prices Prompt Rise in HedgesCopper Price Decines Trigger Hedging Gains

in te tird quarter t 3.6 billin francs inte furt quarter, accrding t crp-rate filings. Te net ntinal psitinsfr Deutsce Bank and Bank f Americaexperienced little cange.

Te istrical term structure swedsigns f distress in te Italian CDS marketin te last tw weeks, wit te CDS curveinverting and te ne-ear maturit cn-tracts being te mst expensive.


6/10


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vocer Rues Exemptions, Ambiguities wi Mae Poicing, Compiance a Chaenge

Sectin 619 f teDdd-Frank Act sasPRohIBITIoN.Unless terwiseprvided in tissectin, a bankingentit sall nt (A)engage in prpri-etar trading.

Tis srt sen-tence as spawned

an enrmus rule making; running t126 pages in te Federal Register. Manmarket participants will bject tat tis is

a uge impsitin in an attempt t fix aprblem tat did nt exist in te first place.oters will argue tat te rule puts U.Sfinancial institutins at a disadvantagewen cmpeting wit freign institutins.Fr te purpses f te fllwing discus-sin tis is all irrelevant. Barring a new actf Cngress, te law stands. Tis des ntmake te new rule perfect. Tis nte willnl address tw items: te lples tatremain and difficulties in implementatin.

Te law pribits prprietar trading, ntprprietar risk taking. Tus, te regulatinstarts wit te standard definitin f te

trading bk under te market r isk rule. Itten exempts certain psitins as te lawrequires. Tese are underwriting, marketmaking, edging, gvernment bnd trad-ing, lan trading and spt freign excangeand cmmdities trading. Tere are twcategries f exemptin; tse f frm andtse f intent.

Exemptins f frm start wit te nefr U.S. gvernment and agenc bndsincluding tse f Fannie Mae and FreddieMac. Tis is bt self serving and an ac-knwledgment f ecnmic realit. Exceptin cases f cmmn currenc, recall tecurrent prblems wit te eur, te gvern-

ment knws tat if it fails it will be in npsitin t bail ut banks lding gvern-ment debt. Making te distinctin betweenprprietar trading and autrized bankactivit is virtuall impssible. Banks avealwas taken significant interest-rate riskn teir balance seets. Tis is te basicbrrw srt, lend lng mdel tat as

existed since banks were invented. Teextra duratin risk taken b a trading bkis immaterial relative t te duratin riskin te banking bk. Te mst surprisingting abut tis sectin f te rule is tatinterest rate swaps are nt exempt. Tisis mre a matter f plitics tan f risk.In tdas envirnment, derivatives are inte plitical dg use and it wuld bete brave regulatr indeed, w tried tmake a distinctin between simple prd-ucts and te prverbial vlatile ccktail frisk der ivatives.

Spt cmmdities and freign excange

are exempt fr mre cmplex reasns.Cmmdit trading is alread iglrestricted at banks and it is unlikel tatkeeping te exemptin fr spt cmmdi-ties wile restrictins remain in place frcmmdit derivatives will allw banksmuc leewa fr speculatin. Spt freignexcange is simpl cas. An bank dingbusiness in multiple cuntries can easilmake te case tat an currenc psitinit as is te result f eiter edging rnt edging its me currenc earnings.Frcing freign excange transactins intclearing uses as prven impssible and

exempting freign excange trading frmprprietar trading regulatin equall dif-ficult. Tis desnt mean it isnt risk. Riskmanagers at banks ave lng been leerf currenc psitins in emerging markets.Te are muc riskier tan equities r igield debt. Even develped currencies canbe subject t buts f currenc speculatin.Gerge Srs made is reputatin as aprprietar trader b breaking te pund.he wuld be quite surprised t find ut tattis wasnt prprietar trading.

Te final exemptin f frm is te mstsurprising. All lans, frm reps t straigtdebt are exempt. Tis leaves tw enr-

mus lples fr risk taking. As in terecent case f MF Glbal, banks can enterint term rep facilities n risk debt. Evenmre imprtant, banks are allwed tfreel engage in lan trading. Wile a bankcannt take a speculative psitin in aninvestment grade bnd, a trading psitinin distressed debt, n matter w large, is

allwable. Te reasning seems t be tatsince banks are in te business f makinglans ten we cant restrict lans trading.Since lans are nt marked t market andare tecnicall nt in te trading bk, teare allwable. onl te legal frm f teinstrument matters. It desnt matter if telan was purcased n te pen market rsurced directl frm te brrwer.

Exemptins f intent include underwrit-ing, edging and market making. Under-writing and edging are bvius. Bankspla an imprtant rle in capital frmatin.It makes n sense t allw a bank t

prvide bridge- lan capital t a cmpanbut nt allw te bank t participate inte takedwn and sale f te crpratebnds. hw culd te regulatrs arguetat edging activit is a bad risk? Terule rigtl states tat edges suld beundertaken in te business unit tat adte risk. An edges at te crprate levelmust ave strict gvernance.

Market making is prbabl te mstcmplicated area t plice. It is eas tsee wat is ging n in liquid marketssuc as equities, interest rate swaps andgvernment bnds. oter markets are

mre prblematic. Traders are ften askedt take psitins tat te cannt immedi-atel fflad. Te rule recgnizes tis andit is encuraging tat it is nt prescriptivein te determinatin f wen a trade isprprietar. A large sectin f te rule isdevted t recrd keeping and risk reprt-ing intending t create te data t analzete surces f prfit and lss. B itself tisis nt a bad ting. Mst f te recrd keep-ing is smeting tat an gd trading firmwill d fr its wn purpses.

Te real prblem wit tis part f te ruleis tat it is a bit premature. It presuppsestat te regulatrs will be able t use large

amunts f statistical data t determinete intent f te trader. Wile tis ma bepssible in te lng run, we d nt aveenug istrical data t make te distinc-tin tda. Te first few ears f te rule willikel see man arguments abut exactlwere te line is between market makingand prprietar trading.

RISk INSIGHT CoMMENTARy By ADAM LITKE


7/10


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CREDIT DEFAUlT SwAP INDICATORS

fnancasCredit Rating *

5Y WTD Chg % YTD % USD m YoY Chg

Issuer: Best Performing

Residential Capital LLC 5253 -29.97 866.66 Ca/CCC/CCC 1,166 1%

Bank of Ireland 1256 -1.33 64.46 -79.58 Ba2/BBB/BB+ 233 -63%

Sumitomo Mitsui Banking Corp 274 -1.04 206.11 -30.15 Aa3/A/A+ 575 24%

Suncorp Group Ltd 257 -0.33 53.53 -6.50 A2/A/A+


8/10


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Credit default swap iNdiCators...

Credit Rating *

5Y WTD Chg % YTD % USD m YoY ChgIssuer: Best Performing

Clear Channel Communications 2336 -11.93 62.17 Ca/C/CCC- 1,405 -6%

Temple-Inland Inc 47 -7.85 -81.37 49.76 Baa3/-/BBB 1,328 -20%

Reed Elsevier PLC 88 -3.67 16.24 -8.29 Baa1/A-/BBB+ 1,081 -17%

Matsui Securities Co Ltd 299 -3.37 56.42 -43.77 -/-/-


9/10


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yIElD CURvE DEvIATIONS Current vs. ne ear ag and five-ear average

Dar Sap Er Sap

Sern Sap Japanese yen Sap

1M 1Y 3Y 5Y 8Y 10Y 15Y 20Y 30Y0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

US Dollar Swaps (30/360, S/A) 5Y

Average

US Dollar Swaps (30/360, S/A) as

of 25/11/2010

US Dollar Swaps (30/360, S/A) as

of 25/11/2011

1M 1Y 3Y 5Y 8Y 10Y 15Y 20Y 30Y0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

Euro Swaps Curve 5Y Average

Euro Swaps Curve as of

25/11/2010

Euro Swaps Curve as of

25/11/2011

1M 1Y 3Y 5Y 8Y 10Y 15Y 20Y 30Y0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

British Pound Swaps Curve 5Y

Average

British Pound Swaps Curve as of

25/11/2010

British Pound Swaps Curve as of

25/11/2011

0.000

0.500

1.000

1.500

2.000

2.500

Japan Yen Swaps Curve 5Y

Average

Japan Yen Swaps Curve as of

25/11/2010

Japan Yen Swaps Curve as of

25/11/2011

CROSS-ASSET CORRElATIONSTree-mnt crrelatins f dail returns are displaed belw te diagnal; tree-mnt crrelatins ne ear ag are displaed abve te diagnal

Column1

EUR-

USD X-

RATE

USD-

JPY X-

RATE

USD-GBP

X-RATE

ESTOXX

50 INDEX

S&P

500

INDEX

MSCI

EM

INDEX

MARKIT ITRX

EUROPE

06/16

MARKIT

CDX.NA.IG.16

06/16

EUR SWAP

ANNUAL

10 YR

GOLD

SPOT

$/OZ

CRUDE OIL

FUTURE

EUR-USD X-RATE 1.00 -0.34 -0.65 0.48 0.52 0.53 -0.41 -0.47 0.02 0.38 0.37

USD-JPY X-RATE -0.32 1.00 0.12 -0.07 0.11 -0.07 0.07 -0.10 0.41 -0.43 0.02

USD-GBP X-RATE -0.75 0.14 1.00 -0.36 -0.41 -0.48 0.27 0.40 0.05 -0.42 -0.40

EUROSTOXX 50 INDEX 0.74 -0.20 -0.70 1.00 0.72 0.58 -0.67 -0.59 0.43 0.27 0.31

S&P 500 INDEX 0.70 -0.25 -0.54 0.72 1.00 0.58 -0.43 -0.78 0.45 0.28 0.59

MSCI EM INDEX 0.58 -0.14 -0.62 0.72 0.51 1.00 -0.49 -0.52 0.07 0.34 0.53

MARKIT ITRX EUROPE 06/16 -0.81 0.29 0.62 -0.90 -0.68 -0.66 1.00 0.66 -0.33 -0.13 -0.20

MARKIT CDX.NA.IG.16 06/16 -0.65 0.26 0.46 -0.70 -0.81 -0.48 0.71 1.00 -0.42 -0.23 -0.50

EUR SWAP ANNUAL 10 YR 0.78 -0.11 -0.59 0.74 0.56 0.45 -0.72 -0.60 1.00 -0.27 0.12

GOLD SPOT $/OZ 0.29 -0.20 -0.34 0.20 0.08 0.40 -0.24 -0.01 0.03 1.00 0.36

CRUDE OIL FUTURE 0.59 -0.12 -0.49 0.67 0.62 0.61 -0.60 -0.48 0.46 0.28 1.00

Sterling and dllar swaps flattened frm te 18-mnt term and 7-ear term respectivel, wit a net decrease n te 2-10 spread f 14basis pints fr te sterling swaps. yen swaps experienced a steepening frm te 2-ear term.

Te crrelatin between EUR/USD and S&P 500 and Eur Stxx 50 indexes reaced recrd igs. Als, crrelatin between USD/GBPand S&P 500 reaced a recrd ig tis week at -0.54. Credit indexes and gld bt swed increased crrelatin wit equit indexes.


10/10


1 2 3 4 5 6 7 8 9 10

Q: Dansh pensn nds have a eac ern hh xed-rae aranees memers - ha s PenSams expsre?

A: Te 4 percent interest-rate guaranteesaccunt fr rugl 50 percent f te fund.Tirt t tirt-five percent is in 3 percentand te rest is in zer guarantees. Te ig-interest guarantees are nw 100 percentedged, and all new mne cmes in n tezer and 3 percent guarantees. yu culdsa tat te guarantees frced us t edge.Needing t edge, we cnstructed tings ina certain wa t edge tail risk. We like t

tink we are at te frefrnt f edging urinterest-rate guarantees.

Q: And he asse acan r he der-en enes?

A: In te ig-guarantee funds, we avete lwest allcatin t equities - as lw as7-11 percent. Alternative investments arebetween 20 percent and 30 percent due ta ig allcatin t real estate and als anincreasing allcatin t private equit. Tene aving te igest risk capacit, tezer percent, as 29 percent in equities,and tat as 26 percent in credit, 15 percentin alternatives and te rest in investment-grade bnds - nl 14 percent in traditinalDanis mrtgages.

Q: i seems ha Denmars mrae-nd mare s a d rann rnd earn a hedn and pns.

A: Investing in Danis mrtgages is cm-plex because f te negative cnvexit duet tem being prepaable. Tere was a timewen I ran fixed incme at a different fund,and ever time I expected smeting t gup it went dwn, and vice versa. S I said

we ave t retink tis. Wic factr is giv-ing u te return and wic nes are nt?I built up a perfrmance-attributin mdel,s peple culd understand wic factrst edge ut i.e. te nes giving negativealpa. After tat learning pase, we startedt perfrm again. Were we culdnt remvelinear risk trug swaps r futures, weused caps, flrs and swaptins t remvete negative cnvexit.

Q: H d hn a rs andrern?

A: Wen setting te strategic-asset allca-tin I use risk-neutral return expectatins

Im tring t get t te lng-term riznb surviving te srt-term rizn. We trt increase returns b making tactical bets,lking at ptential utcmes n te upsideand te dwnside and te prbabilit frtese scenaris. Tat is w I manage teverall investment risk. We find tat equitiesare te mst risk asset class, n matter wwe d it. Allcating 20 percent t equitiesand 60 percent t ig-ield bnds, we findtat equit is a minimum f 60 percent f mVaR. I ave a uge prblem in equities if tesurprise n te dwnside. S wat I d is tfcus n risk diversificatin in te investment

prtfli, investing in new asset classes,lking fr call-ptin features. We ave tfind a wa f ging fr te upside wile beingprtected n te dwnside.

Q: the hh aranees mean ha rdnsde s parcar severe hennd eds are . in 2011, h ddr hnn evve?

A: Lking at mark-t-market f ur liabilities,were te average guarantee is 3 percent,wen u calculate wat appens wen ratesg t zer, te cnvexit ges ver a cliff -its dramatic. At te beginning f te ear Iexpected rates t g up, s I was underweigt

duratin, quite significantl. Ten we lked atte frward rates in Marc. Five-int-10-earfrward rates were clse t 5 percent. on afrward basis, rates ad actuall increased,but I still expected spt rates t g up but atte same time needed t take prfit. S Iused a edging strateg tat still allwed met utperfrm if rates went up, but increasedm expsure t receiver swaptins if I made amistake and rates did g dwn.

Q: there s a rmr ha enered n

hs srae pn he advce MranSane. is ha re?

A: I wnt cmment n te identit f urdealers. I will sa tat tere was a Lndnbank tat called me, asking me t lk atte frward rates instead f te spt rate.A banker advised me t me t cangem view and I did. Im nt cleverer tante market - Im just tring t arvestte risk premias and t prtect m prfitfrm market mves. he was te clevergu. W take a uge risk just t benefitfrm rates ging up wen te alreadad gne up and te prbabilit f rates

ging dwn ad increased? I tr t benefitfrm bt wrlds and I need swaptins frtat, terwise I cant get te asmmetricreturn prfile. In fact, u get a dublebenefit: frm rates ging dwn and frmvlatilit increasing. Tats w u makea tn f mne.

Q: H mch dd mae?

A: We bugt eur swaptins n 30-earswaps tat were 50 basis pints ut-f-te-mne were te earl premium cst nte grss assets is 0.3-0.5 percent r abut50 millin eurs fr ur fund. on Nv. 18, teprfit std at 713 millin eurs, cmbining

te effect f rates ging dwn and vlatilitexpsure. Te bttm line is tat I made 3percent utperfrmance n AUM frm tisstrateg and increased te slvenc f tecmpan. I made a return tat mre tancmpensated fr te lss cmpared t mbencmark n equities were we ad anegative return f 15 percent.

Q: wd descre hs ears perr-mance as en de apha r ea?

A: I wuld sa ur tail risk edge was a gdbeta investment. yu suld start frm teasset-class level, tring t find ut wetertere are embedded pssibilities f gaining

a ig return, r alpa. Ten u suld lkt urself: d I ave enug skills suc tatu can leverage tat and actuall insulatete alpa? Academics sa tat alpa isabut skill-based investment, and suld beuncrrelated t te beta f asset classes. Isimpl dnt understand w u can d tatbecause ure taking a tn f basis risk tr-ing t remve te beta risk. yu can be killedb tat. If u dnt understand it r ave teskills t identif it, ure dead.

benn bchardAndersen is ciefinvestment fficer fPenSam, te 11 billin-eur Danis ealtcarewrkers pensin fund.he tells BlmbergsNiclas Dunbar abutte separatin f alpaand beta, and teswaptin tail-risk edgetat earned is fund700 millin eurs in tespace f a few mnts.

IN CONvERSATION

PenSams Andersen on Tai-Ris Hedging, Saptions, the Dangers o Apha

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