Risk Panel Financial October 27, 2008 Financial Risk Management - PDF document

Risk Panel Financial October 27, 2008

Financial Risk Management Panel • Brent Callinicos, Treasurer, Google – Fx Risk Management • Jim Colby, Assistant Treasurer, Honeywell International – Interest Rate Risk Management • Dennis Sweeney, Deputy Treasurer, General Electric Company – Customer Fx 2 CONFI DENTI AL

Slide from 2007 AHA Risk Panel • War (Iraq): Volatile Commodities Prices • Greed (Subprime): Credit Tightening • Ignorance (Consumers): Fed Cuts • Intolerance (Everyone Else): Weak $ 3 CONFI DENTI AL

Event Risk & Fat Tails • Do You Stress Test? • It’s a good prospective test for FAS 133 • It’s good for SEC risk reporting or IFRS 7 • It’s good if you use VaR – VaR only gets 95% confidence – Stress Test can capture 5 times in 100 4 CONFI DENTI AL

Chasing Tails • Airwise News March 17, 2005 – “US airlines face billions of dollars in extra costs from soaring fuel prices suffered some USD$10 billion in losses last year.” – “Delta, American and Continental are the three major US airlines which have the least hedging to protect them from jet fuel prices…” • New York Times, October 22, 2008 – United, Citing Fuel Hedging, Loses $779 Million in Quarter – “noncash charge that reflected the declining value of its hedging contracts for jet fuel” – “Southwest said it lost $120 million, its first loss in 17 years, because of its own charge to reflect the declining value of hedge contracts. Without the charge, Southwest earned $69 million.” 5 CONFI DENTI AL

Betting Against USD • Citic punting on Fx Accelerators • Comercial Mexicana Bankrupt • Estimated $30bn impact to 200 Brazil Co.s 6 CONFI DENTI AL

Are You Really Hedging or Trading? • How Gamblers Think – I can always bet more – The dealers due for a bad streak – I lost money but I had fun and got free drinks • How Hedgers Think – I am average costing my hedge – AUD will revert back to historic mean – I made money on my exposure…I can expense these drinks cant I? • Not hedging is taking biggest risk 7 CONFI DENTI AL

Hedge Decision Making Quadrant High RELIABILITY OF EXPOSURE Average e Forward or Rate Forward Swap Med No Clue CERTAINTY OF MARKET Damn Sure Average Rate Put or Call Option Don’t Don’t Hedge Trade Low 8 CONFI DENTI AL

Brent Callinicos Treasurer Fx Risk Management 9 CONFI DENTI AL

Interest Rate Risk Management at Honeywell Alexander Hamilton Best Practices Conference 27-Oct-08

Interest Rate Risk Management at Honeywell Long-Term Rates Low Long-Term Rates High Issue Fixed-Rate Debt, Issue Fixed-Rate Debt and Cost of Unwind Swaps to Floating, Swap to Floating, Issue Liquidity Low Issue Longer-Term FRNs* Longer-Term FRNs* and Swap to Fixed Issue Short-Term Debt and Issue Short-Term Debt, Cost of Swap to Fixed # , Unwind Unwind Swaps to Fixed, Wait Liquidity High to Issue Long-Term Debt Swaps to Floating * More difficult to execute due to lack of market depth for long-dated FRNs # More difficult due to accounting complexity of swapping CP/short-term debt to fixed Current Market Presents Many Challenges 11

Dennis Sweeny Deputy Treasurer Customer Fx 12 2008 AHA Financial Risk October, 2008

GE Financial Markets & GE Money Banks Customer FX E - Trading Project Operating Project Goals Model Improving Compliance, Risk Management & Customer request Trade Execution new trade via phone / other trading request Business Requirements systems Provide FX and derivative service to customers � Speed of execution Customer Trades Requested / Booked in e trading platform � Need for coverage in emerging markets � Competitive pricing GE Bank Central GE Bank Treasury Import Trade to GE Treasury Policy Review Trades / GE Bank trade Compliance & Risk Management Request Trades / capture system � No speculative transactions, trading, or Request Quote unmatched positions � All FX / derivatives must be executed by GEFM – Import Bank Corporate Treasury GEFM- Customer Street & Trades, Bank Street GEFM - GE Bank / – GEFM trades Receive Bank Trade GEFM GEFM Offering GEFM trades & executed Deals in e execution trades Executing $1 trillion Per Annum in FX Alone GEFM – over e platform completed placed in � Street Trade Treasury’s COE for FX trading platform or & trade aggregator to trade � Over 40 Market Counterparties telephone tickets capture � Economies of Scale available system � Strong Controllership & Compliance Counterparty � Adherence to Policy GEFM As Counterparty to Counterparty Bank Business Execution using e A Single GE Face to the Street platform 13 2008 AHA Financial Risk October, 2008