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					                                     THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA


                                    Etienne Lacroix
                                    etienne.lacroix@jpmorgan.com
                                    (1) 212 – 834 - 2260
STRICTLY PRIVATE AND CONFIDENTIAL




                                    October 2011
                                                    Introduction

                                                            This presentation will attempt to illustrate the evolution of the usage of financial derivatives in global markets and in select
                                                             Latin American countries (when data is available)

                                                            Given that they represent the majority of the traded volume globally, we will concentrate in three of the most active
                                                             derivatives markets: FX, Interest Rates, and Commodities.

                                                            We will delve into what are the reasons driving companies and countries to enter into financial derivative transactions and
                                                             what the evolution in the use of Financial Derivatives has been in the region

                                                            We will conclude by outlining our prognostics with regards to the future of the industry and our opinions on possible
                                                             developments
THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA




                                                                                                                           1
                                                    Agenda



                                                             Derivatives - What Are We Talking About ?            2



                                                             The Use of Financial Derivatives                     5



                                                             Implementing Risk Management Policy                  21



                                                             Annex A: Basic Derivative Product Descriptions       31
THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA




                                                             Annex B: JPM Commodity Capabilities                  36




                                                                                                              2
                              What Are We Talking About When We Say “Derivatives”

                                                                            Basic Facts about Derivatives

                                 Basic Definition: Financial Contract whose value depends on the level of another variable or underlying

                                 Users:
                                                   Investors (Pension Funds, HF, Mutual Funds, Central Banks, Retail, etc.)
                                                   Corporate (Multinationals, local companies, Producers, etc.)
                                                   Sovereign Entities

                                 Instruments:
                                                   Swaps, Forwards, Futures (Fixing a future uncertain cash flow)
                                                   Options (the Right but not the obligation to buy or sell)
                                                   Exotics (any other non-standard payoff)

                                 Tenor:
                                                   Depends on market and underlying, from very short tenor to +15 years
WHAT ARE WE TALKING ABOUT ?




                                 Derivative Markets:
                                                   FX
                                                   Interest Rates
                                                   Commodities
                                                   Credit
                                                   Others: Hybrids, Weather related (Rainfall, Temperature, etc.)

                                 Market Place:
                                                   Organized Exchanges (such as the CBOT or NYMEX)
                                                   Over-the-Counter (“OTC”) – bilateral trade with counterparty
DERIVATIVES -




                                 Objectives:
                                                   Speculation
                                                   Hedging
                                                                                                    3
                              Basic Overview of Financial Derivatives

                                                             Fixing Future Cash Flows through Futures, Forwards or Swaps
                                Futures, Swaps and Forwards are financial contracts that allow the user to fix an uncertain future cash flow

                                Why uncertain ? Because the future price level is not known yet and will depend on many unforeseeable factors. Examples:

                                                Libor rate in 180 days or in 5.2 years

                                                Imports on March 20 2012, denominated in EUR or JOY

                                                Copper exports to happen during 2H12

                                                10 Year Treasury Level relevant for a new bond issuance in 2 months time

                                By using Forwards or Swaps these future uncertain cash flows can be “fixed”, thus fully known in advance

                                Benefits vs. Risks:

                                                Price Certainty versus Opportunity Cost
                                             
WHAT ARE WE TALKING ABOUT ?




                                                 Other risks:
                                                          Legal risks
                                                          Operational risk (execution, transfers, etc)
                                                          Counterparty risk, etc. (bankruptcy of counterparty)


                                                                                       Financial Options

                                 In contrast to Swaps (or Forwards), options provide an asymmetric payoff (downside and upside are not similar)

                                 For the right to participate in a certain price movement, the buyer has to pay a premium in order to avoid being exposed to
                                    the opposite price movement
DERIVATIVES -




                                 By combining different option types (Calls, Puts) different profiles could be obtained, depending on needs, views, etc.

                                 Exotics (non-standard payoffs very common)


                                                                                                    4
                                                    Agenda



                                                             Derivatives - What Are We Talking About ?            2



                                                             The Use of Financial Derivatives                     5



                                                             Implementing Risk Management Policy                  21



                                                             Annex A: Basic Derivative Product Descriptions       31
THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA




                                                             Annex B: JPM Commodity Capabilities                  36




                                                                                                              5
                                   Derivative Use across Sectors is Very High for Fortune 500 Companies Worldwide
THE USE OF FINANCIAL DERIVATIVES




                                        Source: ISDA News Release April 23, 2009

                                                                                   6
                                   Firms are Increasingly Using Derivatives Markets to Hedge Financial Risks


                                       Current usage of derivatives                                                           Commentary
                                                Do not use
                                                                                                                                Historically, a significant number of large companies have
                                                derivatives
                                                                                                                                   been utilizing financial instruments for risk management
                                                    6%
                                                                                                                                   purposes
                                                                                                                                    Based on an ISDA survey conducted in 2009, 94% of
                                                                                                                                       top large companies currently use derivatives (up from
                                                                                                   Use derivatives
                                                                                                                                       92% in 2003)
                                                                                                        94%
                                                                                                                                Over the course of the last 5 years, the total outstanding
                                                                                                                                   notional amount has increased significantly

                                                                                                                                Mix from swaps to options has increased of late with a
                                                                                                                                   drop in option volatility
                                       Source: 2009 ISDA survey for Global Fortune 500 companies


                                       Current derivative usage by the world’s largest companies

                                                                            % Using FX                         % Using interest rate                     % Using commodity
THE USE OF FINANCIAL DERIVATIVES




                                                                                    96% 94%                                                                        92%                     92%
                                          85%                  84% 81%                                                        86% 86%            85%                     86%         88%
                                                                                                               80%                                                                               83%
                                                      79%                                                                                              75%
                                                70%                                                      72%
                                                                                               63%

                                                                          39%                                                           37%                  35%

                                                                                                                                                                               15%
                                                                                                                     8%


                                          Basic materials     Consumer goods           Financial          Healthcare          Industrial goods     Services         Technology         Utilities

                                       Source: ISDA news release published on April 23, 2009

                                                                                                                          7
                                   Disclosed Hedging of North American Mining Companies
                                       Disclosed Hedging of North American Mining Companies
                                                                             Peer         Max Tenor    Disclosed Commodities Exposures Hedged
                                                                            Barrick       60 months    Interest Rate Swaps, FX Forwards (AUD, CAD, CLP, EUR, PGK), Base Metals Zero Cost Options Collars
                                                                                                       (Copper), Energy Swaps (Diesel, Propane, Natural Gas, Electricity)


                                                                           Goldcorp      6-12 months   FX Forwards & Options (CAD, MXN), Base Metals Swaps & Zero Cost Options Collars (Copper, Zinc, Lead),
                                                                                                       Energy Swaps (Heating Oil)


                                                                           Newmont        60 months    FX Forwards (AUD, NZD, IDR), Energy Swaps (Diesel), Interest Rate Swaps



                                                                            Kinross       36 months    Precious Metals Forwards & Options (Gold, Silver), FX Forwards (BRL, CLP, RUB, CAD, EUR), Energy
                                                                                                       Swaps (Crude Oil)


                                                                         Agnico-Eagle      12 months   FX Forwards (CAD), Base Metals Zero Cost Options Collars (Zinc)



                                                                           IAMGOLD         36 months   Precious Metals Zero Cost Options Collars (Gold), FX Options & Forwards (CAD, EUR), Energy Options and
                                                                                                       Swaps (Heating Oil), Base Metals Options (Aluminum)


                                                                         Hecla Mining      36 months   Base Metals Swaps (Zinc, Lead)



                                                                         Jaguar Mining     6 months    FX Forwards (BRL), Precious Metals Zero Cost Options Collars (Gold)
THE USE OF FINANCIAL DERIVATIVES




                                                                           Capstone        48 months   Base Metals Swaps (Copper, Lead, Zinc)
                                                                            Mining


                                                                          Breakwater       12 months   Base Metals Options (Copper, Lead, Zinc), Precious Metals Options (Gold, Silver)
                                                                          Resources


                                                                            Century        12 months   Energy Swaps (Natural Gas), Base Metals Swaps & Zero Cost Options Collars (Aluminum)
                                                                           Aluminum


                                                                         Alpha Natural     12 months   Energy Swaps & Options (Diesel, Natural Gas), Interest Rate Swaps
                                                                          Resources


                                      Sources: Third Quarter 2010 Financial Reports of each company
                                                                                                                          8
                                   Size of Foreign Exchange (FX) OTC Derivatives Market Worldwide Continuous to Grow
                                   BIS 2010 Data

                                          In the past 10 years the global OTC FX market has more than doubled.

                                          While the Spot and Swaps markets still represent the bulk of the trading volume, there has been a significant increase in the
                                             Options and Forwards markets as well.

                                          Swaps volume has been greater than spot volume every year for the past 12 years, showing how the usage of derivatives is
                                             becoming a central part of business transactions and gaining traction as a solution to mitigate risk exposure.

                                          Now, let’s compare how Latin American markets are tracking the rest of the world…




                                      OTC FX Markets Worldwide (Billions US$/Day)

                                                                      1998                 2001                 2004                  2007                    2010

                                                Spot                  568                  386                   631                 1,005                    1,490
                                              Forwards                128                  130                   209                  362                     475
                                             FX Swaps                 744                  663                   975                 1,745                    1,808
THE USE OF FINANCIAL DERIVATIVES




                                              Options                  87                   60                   119                  212                     207


                                                Total                1,527                 1,239                1,934                3,324                    3,980
                                     Source:BIS 2010




                                                                                                          9
                                   ISDA Shows Granular Impact of Past Crisis in the Derivative Use, by Category
THE USE OF FINANCIAL DERIVATIVES




                                                                             10

                                     Source: ISDA Market Survey 2010
                                   Where are FX Derivatives Traded?

                                      For financial derivatives, transaction costs tend to lower when volume increases, this in turn further increases the traded
                                        volume for that asset, creating a virtuous cycle of volume and liquidity.

                                      As Latin America has historically not been a center for financial derivative transactions, it has failed to gain traction as a
                                        mayor powerhouse in total volume traded.

                                      As it can be observed in the pie chart below, geographical areas with far lesser economic size (e.g. Australia, Switzerland
                                        and Hong Kong) have significant higher proportions of FX turnover than Latin America.
THE USE OF FINANCIAL DERIVATIVES




                                                                                                           11
                                   Global Interest Rate Derivatives Use by Instrument Shows Strong Preference to
                                   Swaps
THE USE OF FINANCIAL DERIVATIVES




                                        Source: BIS, Triennial Central Bank Survey, April 2010




                                                                                                 12
                                   The Use of Derivatives has Increased Rapidly in the Last 15 years: Summary
THE USE OF FINANCIAL DERIVATIVES




                                                                             14
                                   The Use of Derivatives has Increased Rapidly in the Last 15 years: Summary
THE USE OF FINANCIAL DERIVATIVES




                                                                             15
                                   ISDA 2010 End User Survey Shows Strong Use of FX, Interest Rate and Commodities

                                     During July and August 2010, ISDA conducted a survey of over-the-counter (OTC) derivatives end-users, including non-
                                    financial corporations, asset managers and other financial institutions295 respondents from North America and Europe who use
                                    OTC derivatives participated in the survey. Of these:80% or 234 used interest rate swaps (IRS)


                                        59% or 174 used currency/FX swaps,
                                        27% or 80 used credit default swaps (CDS),
                                        25% or 74 used equity swaps and
                                        32% or 94 used commodity/energy swaps.



                                     Respondents were asked their opinions only on those OTC derivatives that they said they have used

                                     On a 1 to 5 scale, 62% rate IRS price competitiveness at a 4 or 5

                                     Only 10% of IRS end-users rate it at a 1 or 2

                                     Electronic Trading: A majority of those surveyed (77%) believe electronic trading of IRS is beneficial

                                     The majority of surveyed IRS end-users give high remarks to the current level of pre-trade price transparency
THE USE OF FINANCIAL DERIVATIVES




                                     71% of IRS end-users rank it same as or better than FX. 69% rank it same as or better than equities. 83% rank it equal to or
                                       better than corporate bonds. 87% rank it same as or better than ABS




                                    Source: ISDA End-User Survey: Interest Rate Swaps, October 2010




                                                                                                          13
                                   Size of OTC Derivatives in Latin America


                                            Latin American derivatives markets have almost tripled in size in the past 12 years…

                                            … but they still represent less than 1% of the global market for derivatives

                                            In fact, Latin America share of the world’s transactions hasn’t changed significantly in the last 12 years.




                                     OTC Derivatives Markets in Latin America (Billions US$/Day)


                                                                        FX                                       Rates                                        Total

                                                       1998    2001    2004    2007    2010    1998     2001      2004      2007    2010     1998     2001    2004    2007    2010
                                       Argentina        2.2     0.0     0.7     1.1     1.6     0.0      0.0       0.0       0.0     0.0      2.2      0.0     0.7     1.1     1.6
                                         Brazil         5.1     5.5     3.8     5.8    14.2     0.0      0.3       0.9       0.1     7.5      5.1      5.8     4.7     5.9    21.7
                                         Chile          1.3     2.3     2.5     4.0     5.5     0.0      0.0       0.0       0.0     0.2      1.3      2.3     2.5     4.0     5.7
                                       Colombia         0.0     0.4     0.8     1.9     2.8     0.0      0.0       0.0       0.0     0.0      0.0      0.4     0.8     1.9     2.8
                                        Mexico          8.7     8.6    15.3    15.3    17.0     0.2      0.4       1.4       2.9     1.4      8.9      9.0    16.7    18.2    18.4
                                         Peru
THE USE OF FINANCIAL DERIVATIVES




                                                        0.0     0.2     0.3     0.8     1.4     0.0      0.0       0.0       0.0     0.0      0.0      0.2     0.3     0.8     1.4


                                      Total Latam      17.3    17.0    23.4    28.9    42.5     0.2      0.7       2.3       3.0     9.1     17.5     17.7    25.7    31.9    51.6
                                      Total World      2,099   1,692   2,609   4,281   5,056    344      676     1,331      2,173   2,698    2,443    2,368   3,940   6,454   7,754
                                     Source:BIS 2010




                                                                                                           16
                                   Mexico FX Market by Product

                                                     Mexican OTC FX Market
THE USE OF FINANCIAL DERIVATIVES




                                   Source:BIS 2010




                                                                             17
                                   Colombia FX Market
                                     Colombia OTC FX Market by Product        Colombia OTC FX Market por plazo




                                   Source:BIS 2010
THE USE OF FINANCIAL DERIVATIVES




                                                                         18
                                   Chile: Policy Makers Have Expressed Continuous Interest in the Development of
                                   Local Derivative Markets
THE USE OF FINANCIAL DERIVATIVES




                                    Source: IMF Working paper




                                                                            19
                                   Macro Hedging on Country Level has Experienced Particular Interest During the
                                   Last Decade in Latin America
THE USE OF FINANCIAL DERIVATIVES




                                                                           20
                                                    Agenda



                                                             Derivatives - What Are We Talking About ?             2



                                                             The Use of Financial Derivatives                      5



                                                             Implementing Risk Management Policy                   21



                                                             Annex A: Basic Derivative Product Descriptions        31
THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA




                                                             Annex B: JPM Commodity Capabilities                   36




                                                                                                              21
                                      Some Basic Facts to Consider when Implementing a Risk Management Policy
                                                                                     Basic Facts about Risk Management

                                         Risk Management should not be a financial-product driven process but rather an analytical, consistent, recurrent and rational
                                           decision based part of any Risk Assessment and Mitigation Analysis:


                                                           Analytical: it performs a full analysis and understanding of the different exposures and their relationships
                                                           Consistent: hedging decisions are defined within a Risk Management Policy and are not one-off events
                                                           Recurrent: it recognizes and addresses the dynamic nature of the financial (and other) exposures
                                                           Rational: decisions are not made randomly
                                                           The discussion of financial products and their relative advantages / disadvantages will be part of the last stage
                                                            of the Risk Management Policy (and not vice versa)



                                                                                                                               Factors to consider in any Hedging Policy
                                                                                                                           Leverage
                                                    Floating Portion                      - Unhedged
                                                    Floating Portion
                                                                                                                           Industry
IMPLEMENTING RISK MANAGEMENT POLICY




                                                                                                                           Competitive Landscape

                                                                                                                           Financial break-even point
                                                                                         - More sophisticated products
                                                   Tactical Hedging                                                        Future financing needs
                                                                                         - Exotics
                                                                                                                           Future capex

                                                                                                                           Diversification in product lines
                                                                                          - Usually simple products        Financial Sophistication and understanding
                                                   Baseline Hedging
                                                                                          - Swaps, Options, Collars
                                                                                                                           Local tax and accounting treatment, etc.




                                                                                                                 22
                                      Key drivers of the Hedging Decision



                                                               Business         Yes
                                         Decision to
                                                                viability                               Hedge
                                           hedge
                                                                 risk?




                                                                                           POLICY
                                                                     No



                                                              Meaningful        Yes
                                                                                                        Hedge
                                                            impact to value?




                                                                                           MANAGEMENT
                                                                     No
IMPLEMENTING RISK MANAGEMENT POLICY




                                                            Are competitors     Yes
                                                            hedging financial                           Hedge
                                                                 risks?


                                                                     No                    RISK

                                                                 Are any
                                                       No     exposures at      Yes
                                        Do not hedge                                                    Hedge
                                                              opportunistic
                                                            levels to hedge?




                                                                                      23
                                      Market Moves Greater than Two-Standard Deviations are not Unseen Events in
                                      Commodity Markets – In Fact, They Have Occurred Repeatedly in the Recent Past


                                          WTI Crude Oil Price Performance vs. 2 – Standard Deviation Risk Cone (Assuming Jan 2, 2008 Market Data)




                                                                 $130                                   2 - Standard Deviation
                                                                                                        Potential Move
                                              Price ( $ / bbl)




                                                                                                                                                           Within a 10-month period,
                                                                                                                                                           WTI had a +2 and -2 standard
                                                                                WTI                                                                        deviation move

                                                                  $80
IMPLEMENTING RISK MANAGEMENT POLICY




                                                                  $30
                                                                  Jan-2007   Apr-2007   Jul-2007   Oct-2007   Jan-2008   Apr-2008   Jul-2008   Oct-2008   Jan-2009   Apr-2009   Jul-2009

                                          Source: JPMorgan




                                                                                                                            24
                                      The Same is True for FX and Interest Rates Markets


                                          Exchange rate USDBRL vs. 2 – Standard Deviation Risk Cone (Assuming Jan 2, 2007 Market Data)




                                                                           $2.6


                                                                                            2 - Standard Deviation
                                                                           $2.4             Potential Move
                                              Exchange Rate USDBRL)




                                                                           $2.2                                              Within a 10-month period,
                                                                                                                             BRL had a +2 and -2 standard
                                                                                                                             deviation move
                                                                           $2.0    USDBRL



                                                                           $1.8
IMPLEMENTING RISK MANAGEMENT POLICY




                                                                           $1.6



                                                                           $1.4
                                                                                             6




                                                                                             6




                                                                                             7




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                                                                                             8




                                                                                             8




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                                                                                       -2




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                                                                                      l-2




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                                                                                  O




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                                                                                  O
                                          Source: JPMorgan




                                                                                                                     25
                                      Analysts Forecasting Commodity Prices Have Shown Low Accuracy in the
                                      Recent Past

                                           Monthly crude oil price forecast published by a well-known international consulting firm has shown low accuracy when
                                                                       compared versus ex-post (real) prices, not only for long forecast horizons (12-18 months) but also in the short term (1-3
                                                                       month period). Based on monthly published reports from 2002 - 2010

                                           To base financial decisions on published forecasts could potentially become a dangerous proposal given that historically
                                                                       financial analysts have exhibited low predictive powers, not only in Commodities but across different asset classes


                                                                        80.00%

                                                                        60.00%

                                                                        40.00%
                                                                                                                                                                                               Maximum
                                           Percentage Forecast Error




                                                                        20.00%

                                                                         0.00%

                                                                        -20.00%
IMPLEMENTING RISK MANAGEMENT POLICY




                                                                        -40.00%
                                                                                                                                                                                                25% Percentile

                                                                        -60.00%
                                                                                                                                                                                                75% Percentile

                                                                        -80.00%
                                                                                                                                                                                               Minimum

                                                                       -100.00%

                                                                       -120.00%
                                                                                     1     2   3     4     5     6     7     8      9        10   11   12   13    14    15    16    17    18
                                                                                                                                 Month out
                                                                        Source: JPMorgan




                                                                                                                                    26
                                      Hedge: Rolling and Layering as a Consistent Way to Lower Overall Cash Flow Volatility
                                      How much discretion should your risk policy permit?


                                               J.P. Morgan recommends a policy that mandates discipline in hedging forecasted cash flows. The policy could also allow for
                                                 a measure of discretion within that discipline
                                                  Discretion on whether Client hedges to the minimum required by its policy or up to the maximum allowed in any given
                                                     quarter
                                                  Some discretion on layering trades intra-quarter: When does Client add a layer and how much?
                                                  Ability to layer further out than required

                                                                             100%

                                                                             90%

                                                                             80%

                                                                             70%

                                                                             60%

                                                                             50%

                                                                             40%

                                                                             30%

                                                                             20%

                                                                             10%
                                                                                                           Minimum mandated by policy             Discretion between minimum and maximum mandated by policy
                                                  100%                        0%

                                                                                    Q1 (current quarter)    Q2        Q3   Q4   Q5      Q6




                                                    90%
                                                    80%
                                                    70%
                                                    60%
IMPLEMENTING RISK MANAGEMENT POLICY




                                                    50%
                                                                   Layer E
                                                    40%                                                          Layer E
                                                                   Layer D
                                                    30%                                                          Layer D             Layer E
                                                                   Layer C
                                                    20%
                                                                   Layer B                                       Layer C             Layer D               Layer E
                                                    10%
                                                                   Layer A                                       Layer B             Layer c               Layer D               Layer E
                                                     0%
                                                                  1Q (current                                       2Q                       3Q               4Q                   5Q                    6Q
                                                                   quarter)
                                              Mandatory
                                              % Hedged              50%                                           40%                   30%                  20%                   10%

                                                          [***] Assumptions: sliding scale minimum base level, decreasing discretionary maximum level, 15-month hedging tenor




                                                                                                                                                  27
                                      Different Hedging Profiles Produce Different Reductions in Volatilities

                                           Rebalancing Effects of Different Consistent Hedging Policies – Crude Oil 1996 - 2004




                                           $40.00


                                           $35.00


                                           $30.00


                                           $25.00


                                           $20.00


                                           $15.00
IMPLEMENTING RISK MANAGEMENT POLICY




                                           $10.00


                                            $5.00


                                            $0.00
                                                 May-96      May-97        May-98          May-99     May-00           May-01         May-02          May-03     May-04
                                           ($5.00)

                                                                              Difference      WTI   Hedged Profile 1      Hedge Profile 2      Hedge Profile 3



                                                                                                       28
                                      Different Hedging Profiles Produce Different Reductions in Volatilities

                                           Rebalancing Effects of Different Consistent Hedging Policies – Crude Oil 2004 - 2010




                                           $150.00


                                           $130.00


                                           $110.00


                                            $90.00


                                            $70.00


                                            $50.00
IMPLEMENTING RISK MANAGEMENT POLICY




                                            $30.00


                                            $10.00


                                           ($10.00)
                                                   Jul-04         Jul-05           Jul-06          Jul-07            Jul-08              Jul-09             Jul-10

                                           ($30.00)

                                                                             Difference     WTI   Hedged Profile 1    Hedged Profile 2       Hedged Profile 3



                                                                                                      29
                                      Historical Evolution in the Use of Financial Derivatives in Latin America

                                              In the 1980’s few clients used Derivatives to hedge exposures, the exception to this usually in the agricultural space (through
                                               Futures in the US) and to some extent FX Forwards, when available

                                              During the 1990’s, for several reasons (PC’s, networks, education, sophistication pushed by international banks in local
                                               markets) a widespread boom took off, across different asset classes, be it FX, Interest Rates, Commodities, etc.

                                              From first generation derivatives (standard swaps and options) to second generation and beyond (“exotics”, such as barriers,
                                               and extendible structures to more complex products, such as credit linked transactions) became quickly available – no limit in
                                               terms of pricing, booking and marketing capabilities

                                              Since the introduction of FAS 133 (and other similar accounting standards) corporate users, when affected, have gone back
                                               to more simple structures due to adverse mark-to-market treatment for exotic products

                                              In some jurisdictions tax treatment is (still) not fully clear, such as derivative loss deduction in the income statement, or
                                               withholding tax issues

                                              On average, sophistication has grown strongly across countries and sectors – customers that 10-15 years ago didn’t trade
                                               any derivatives nowadays trade through Bloomberg electronically swaps (or other electronic platforms) and close other
                                               sophisticated trades
IMPLEMENTING RISK MANAGEMENT POLICY




                                              Trades are being booked locally as well as with offshore entities (Banks), under standardized local and ISDA Master
                                               Agreement

                                              Sovereign entities have grown in sophistication as well and macro hedges are not uncommon any more (FX, Commodities,
                                               Rates) in the region

                                              As a general tendency, Derivatives are being used as part of more complex transactions – Capital Markets driven bond
                                               issuance in other local markets and swapped back into local currency, commodity prepays, tax efficient funding structures,
                                               etc.

                                              Local Derivatives have become deeper and with longer maturities as well, similar to the ones seen in some mature markets:
                                                             FX and Rates in Chile, Mexico, Brazil


                                                                                                             30
                                                    Agenda



                                                             Derivatives - What Are We Talking About ?        2



                                                             The Use of Financial Derivatives                 5



                                                             Implementing Risk Management Policy              21



                                                             Annex A: Basic Derivative Product Descriptions   31
THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA




                                                             Annex B: JPM Commodity Capabilities              36




                                                                                                         31
                                                 Buying a Fixed Price Swap

                                                     Key considerations                                                 Illustrative example

                                                      Objective                                                       Net Price               Unhedged           Hedged

                                                        To lock in a forward price

                                                      Description
                                                        Client locks in the price over a predetermined period by
                                                         buying a fixed price swap from J.P.Morgan
                                                        The monthly settlement price is the average of each day’s
                                                         settlement in a given month and compared to the swap
                                                         price                                                                                                        Client receives
                                                         – If settlement price is higher than the swap price, Client                                                  difference
                                                            receives the difference between the settlement price and
                                                            the swap price
                                                                                                                              Client pays
                                                         – If settlement price is lower than the swap price, Client
ANNEX A: BASIC DERIVATIVE PRODUCT DESCRIPTIONS




                                                                                                                              difference
                                                            pays the difference between the swap price and the
                                                            settlement price                                                                                               Potential gains
                                                      Advantages                                                                                                          Potential costs
                                                        The Client locks in a price over a designated time period
                                                         and is protected from any price increase above the swap
                                                         price                                                                                     Market Price
                                                        Price increases in the physical market are compensated by
                                                         hedging gains
                                                        No upfront premium required

                                                      Disadvantages
                                                        The Client loses the potential gain from downward price
                                                         moves below the swap price
                                                        Price declines in the physical market are offset by hedging
                                                         losses




                                                                                                                         32
                                                 Buying a Call Option

                                                     Key considerations                                                     Illustrative example

                                                      Objective                                                           Net Price                  Unhedged           Hedged
                                                        Buying insurance to protect against price increases by
                                                         paying premium upfront

                                                      Description
                                                        A call option creates a cap price in exchange for upfront
                                                         premium, which reflects the likelihood that the option will be                           Call Strike
                                                         exercised. The farther the strike price is from trading levels,
                                                         the lower the amount of premium paid upfront. The call                                                              Client receives
                                                         option will reference a published price                                                                             difference
                                                        The monthly settlement price is the average of each day’s
                                                         settlement in a given month and compared to the “option”                      Premium paid
                                                         strike price
ANNEX A: BASIC DERIVATIVE PRODUCT DESCRIPTIONS




                                                         – If the settlement price is higher than the strike price,
                                                            Client receives the difference between the strike price                                                               Potential gains
                                                            and settlement price. This payment offsets higher prices                                                              Potential costs
                                                            in the physical market
                                                         – Otherwise, the purchased option expires worthless, but
                                                            Client benefits from lower prices in the physical market                                      Market Price

                                                      Advantages
                                                        Client participates fully in downward price movements
                                                         while protecting against price increases above the call level

                                                      Disadvantages
                                                        There is an upfront cost associated with this strategy.
                                                         However, this strategy may prove to be more cost effective
                                                         than locking in a fixed price




                                                                                                                             33
                                                 Consumer Zero Cost Collar

                                                     Key considerations                                                     Illustrative example

                                                      Objective                                                           Net Price                      Unhedged           Hedged
                                                        To hedge at zero cost and still retain some benefit from
                                                         lower prices

                                                      Description
                                                        Client buys a call option and finances it by selling a put                                           Call Strike
                                                         option for the same time period at zero upfront cost. The
                                                         put and call options will reference a published price                                                                        Client receives
                                                                                                                                             Put Strike
                                                        The monthly settlement price is the average of each day’s                                                                    difference
                                                         settlement in a given month and compared to the strike
                                                         levels of the monthly put and call
                                                         – If the settlement price is higher than call strike, the
                                                            Client receives the difference between the settlement
ANNEX A: BASIC DERIVATIVE PRODUCT DESCRIPTIONS




                                                            price and the call strike                                          Client pays
                                                                                                                               difference                                             Potential gains
                                                         – If the settlement price is lower than put strike, the Client
                                                            pays the difference between the put strike and the                                                                        Potential costs
                                                            settlement price
                                                         – Otherwise, no payments are made
                                                                                                                                                              Market Price
                                                      Advantages
                                                        Zero upfront cost method of hedging against upward price
                                                         moves while maintaining some downside participation

                                                      Disadvantages
                                                        If the market price falls below the put strike, the Client will
                                                         pay the difference
                                                        Client has upward price exposure from the current swap
                                                         level to the call strike




                                                                                                                             34
                                                 Hedge: Recommended Financial Instruments – the Risk Spectrum

                                                                                       Each of the available hedge alternatives offers different risk profiles




                                                           Low Risk                                                            Medium Risk                                                            High Risk



                                                                                       Premium                    Zero-Cost                                             Enhanced value                  Written
                                                          Call options                                                                           Swaps
                                                                                       Collars                     Collars                                                strategies                    options

                                                      Guaranteed cap level       Guaranteed cap level       Guaranteed cap          Lock in forward price          No upfront cost          Limited participation in
ANNEX A: BASIC DERIVATIVE PRODUCT DESCRIPTIONS




                                                       in exchange for             partially financed by       level financed by                                        relative to swap          downward price
                                                                                                                                       Consumer receives
                                                       upfront premium             selling put options for     selling put options                                                                movements to the sold
                                                                                                                                          difference between           Locks in more
                                                                                   the same time period        for the same                                                                       put strike price
                                                      Bespoke settlement                                                                 actual price and swap         favorable price today
                                                                                                               time period
                                                                                  Cheaper than outright                                  price, if actual price is                              Maximum benefit is
                                                      Full protection against                                                                                         Unknown potential
                                                                                   call purchase              Zero upfront               higher than swap                                        upfront premium
                                                       price increase above                                    premium cost               price. Otherwise,             cash outflow if
                                                       the cap level              Maintain some                                                                        market prices            Downward
                                                                                                                                          pays the difference
                                                                                   downward                   Maintain some                                            change significantly      participation capped at
                                                      Full participation in
                                                                                   participation               downward                Full protection from                                      sold put strike price
                                                       downward price                                          participation              any price increases
                                                       movements                  Downward                                                                                                      Fully exposed to price
                                                                                                                                          above the swap price
                                                                                   participation capped at  Downward                                                                             increases
                                                      Premium paid to
                                                                                   sold put strike price     participation capped      No upfront premium
                                                       finance hedging                                       at sold put strike           required
                                                                                  Upward price
                                                                                                             price
                                                                                   exposure to calls                                   Forfeits potential
                                                                                   strike price             Upward price                 participation if prices
                                                                                                             exposure to calls            fall below swap price
                                                                                                             strike price




                                                                                                                                     35
                                                    Agenda

                                                                                                                    Page

                                                              Derivatives - What Are We Talking About ?               2



                                                              The Use of Financial Derivatives                        5



                                                              Implementing Risk Management Policy                    21



                                                              Annex A: Basic Derivative Product Descriptions         31
THE USE OF FINANCIAL DERIVATIVES IN LATIN AMERICA




                                                              Annex B: JPM Commodity Capabilities                    36




                                                     DUPONT                                                    36
                                      J.P. Morgan Covers Commodities Across the Supply Chain


                                                          Research                                 Global Commodities                                  Futures & Options

                                           Metals, Bulk Commodities                        OTC Metals, Energy and Ags                      Listed Futures and Options

                                           Energy and Power                                Warehousing Risk                                Specialist Trading Desks

                                           Grains and Agricultural                         Structured Products                             Global Clearing Solutions

                                           Technical Analysis                              Long Dated Contracts                            Electronic Trading




                                          Energy and             Base Metals         Precious Metals      Agricultural    Weather                 Environmental            Plastics
                                          Power                                                                                                   Markets
                                                                  Steel              Gold                Cattle         Temperature                                     Ethylene
                                           Coal                                                                                                   Carbon
                                                                                                           Dairy          Precipitation                                   Polyethylene
                                                                  Nickel             Silver                                                       allowances and
                                           Electricity                                                   Grains                                    offsets (e.g.,
                                                                  Zinc               Platinum                            Wind                                            Polypropylene
ANNEX B: JPM COMMODITY CAPABILITIES




                                                                                                           Soybeans
                                                                                                                                                    RGGI; EUAs;
                                           Natural Gas
                                                                  Tin                Palladium                           Hurricanes              CERs; VERs)
                                           Gasoline                                                       Wheat
                                                                  Copper                                                  Sunshine               Sulphur Dioxide
                                                                                                           Corn
                                           Crude Oil
                                                                  Aluminium                                               Crop Yields            Nitrogen Oxides
                                                                                                          Softs
                                           NGLs
                                                                  Lead                                    Coffee                                 Renewable
                                          Transportation                                                                                            Energy Credits
                                                                  Aluminium Alloy                         Sugar
                                           Freight
                                                                  NASAAC                                  Cotton




                                                                                                                    37
                                      J.P. Morgan named “2011 House of the Year” in Oil, Coal and Natural Gas

                                        Oil and Products House of the Year                                                U.S. Natural Gas House of the Year
                                            J.P. Morgan won EnergyRisk’s Oil and Products House in June 2011                 J.P. Morgan won EnergyRisk’s U.S. Natural Gas House of the Year
                                                                                                                               in June 2011
                                            Innovative financing deals with refiners and state-owned enterprises
                                             demonstrated J.P. Morgan’s continued ability to provide first class              EnergyRisk highlighted J.P. Morgan’s robust deal-making activities
                                             solutions to clients                                                              and purchase of RBS Sempra’s North America gas business

                                            J.P Morgan also showed the importance of maintaining strong                      Resulting in expansion of the Firm’s ability to serve clients through
                                             relationships with clients despite a challenging economic climate                 a diverse network of physical assets in North America
                                                Achieved greatest market penetration for over-the-counter energy                 70 bcf/d of storage capacity
                                                 derivatives                                                                      1.9 bcf/d of transportation capacity
                                                Executed several large tailored transactions to meet clients risk                6 bcf/d of gas marketing activities in 2010
                                                 management needs
                                                                                                                              J.P. Morgan also continued excellence in executing large,
                                                                                                                               structured transactions and risk managing capabilities



                                        Coal House of the Year
                                                                                                                          “Particularly over the last three years, it is fair to say that our
                                            J.P. Morgan won EnergyRisk’s Coal House of the Year in June 2011
ANNEX B: JPM COMMODITY CAPABILITIES




                                                                                                                          share of the wallet overall, in terms of flow and structured
                                            The magazine recognized J.P. Morgan for its “transformational                transactions, has grown dramatically. I think there isn’t a
                                             restructure” of its U.S Coal business highlighting:                          meaningful transaction or opportunity out there that we’re
                                                Increase in offerings                                                    not participating in or competing for.“
                                                International integration
                                                Alignment with changing market fundamentals                                  - Roy Salame, Global Head of Commodities Corporate Sales
                                                Developing export market for thermal coal                                                                     EnergyRisk; June, 2011
                                            J.P Morgan also demonstrated growth in product offering to European
                                             and Asian clients

                                            Increased marketing support, illustrates J.P. Morgan’s leadership within
                                             the Commodities Industry


                                                                                                                     38
                                      J.P. Morgan named “2011 Best Commodities House” by Euromoney

                                        Euromoney Awards for Excellence - June 2011                                       Notable Structured Transactions
                                           Diverse platform of financial and physical capabilities across product           Large syndicated loan facility for a North African producer
                                            areas – energy, metals, investor products, agriculture etc                           In July 2011, J.P. Morgan acted as the lead arranger and
                                                                                                                                  underwriter for a syndicated pre-export credit facility
                                           Strong growth both organically and through strategic acquisitions,
                                            multi-year agreements and large structured transactions                              J.P. Morgan’s leading commodity trading capability enabled
                                                                                                                                  enhanced tailoring of oil hedges to fit with the client’s actual
                                           Integrated RBS Sempra business in 2010 to further develop a strong                    exposure profile
                                            and diversified platform across multiple commodity product types
                                                                                                                             Long term, large volume physical Natural Gas purchase with North
                                               Acquisition nearly doubled physical and financial power business
                                                                                                                              East producer
                                               Expanded our presence in oil, power, gas and metals
                                                                                                                                 In February 2011, J.P. Morgan entered into a large volume, 10
                                           Expanded global presence                                                              year physical index sales agreement with a major North American
                                               Integration of US and Europe Coal and Freight Platform and a                      Natural Gas producer
                                                long-term physical coal supply agreement into German coal fired                  This leverages J.P. Morgan’s existing platform in US and Canada,
                                                power-plant                                                                       providing the client with a credit worthy base load market and
                                               Increased agricultural products presence in emerging market                       access to potentially higher priced markets
                                                regions                                                                      J.P. Morgan acquired and restructured five wind power purchase
                                               Established sales coverage in emerging markets such as Brazil,                agreements to monetize the assets owned by a large renewable
ANNEX B: JPM COMMODITY CAPABILITIES




                                                South Africa and Middle East                                                  energy client
                                           Undertaken innovative projects to transform the J.P. Morgan                          Highlights J.P. Morgan’s continued leadership in executing large,
                                            Commodities business                                                                  structured transactions across commodities
                                               In February 2011, J.P. Morgan launched the Commodity-related                 LNG delivery to the UK
                                                Project Finance business, a joint venture between Commodities                    J.P. Morgan executed delivery of Liquified Natural Gas (LNG)
                                                and Syndicated and Leveraged Finance Business                                     across three continents, purchasing the cargo from a large Middle
                                               Moved the Commodities Research function into the business,                        Eastern gas and power company
                                                publishing some of the industry’s most thought-provoking analysis                Transaction represents the first import of LNG into the UK from
                                                                                                                                  the US in over 50 years




                                                                                                                     39
                                      JPMorgan has Recently Won Every Commodity Award in the Industry



                                                        JP Morgan Named “Quality Leader in US Commodities Corporate Energy” in 2010 by
                                                                                    Greenwich Associates



                                                        JPMorgan Named “Derivatives House of the Year” in 2010 by Energy Risk Magazine




                                                       JPMorgan Named “Commodity Derivatives House” of 2009 by IFR
ANNEX B: JPM COMMODITY CAPABILITIES




                                                        JPMorgan ranked “Most Innovative in Commodities” in 2009 by The Banker




                                                        JPMorgan Named “Commodity Derivatives House of the Year” in 2009 by Risk
                                                                                    Magazine




                                                                                     40

				
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