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Foreign Exchange EURUSD USDJPY GBPUSD Equity Indices S&P500 Nikkei Estoxx 50 FTSE100 Money Markets Eonia Euribor USD Libor UK Libor Interest Rate Swaps 10yr USD swap 10yr EUR swap 10yr JPY swap 10yr GBP swap Government Bonds 10yr US Treasury 10yr Germany 10yr JGB 10yr Gilt Interest rate options 10-20yr USD swaption 10-20yr EUR swaption 10-20yr GBP swaption Credit Indices iTraxx Europe Sovx Europe CDX NA Volatility VIX VSTOXX Commodities Oil Gold 96.29 1,685 5.37 18.61 33.98 40.32 91.44 68.61 214.80 380.55 135.80 104.51 81.38 59.77 31.92 24.15 18.14 77.98 37.22 39.32 1.94 2.18 1.00 2.18 -41.01 -26.49 -11.36 -35.75 2.15 2.66 1.03 2.45 -36.53 -19.15 -11.14 -30.82 0.72 1.47 0.51 1.03 -12.00 46.52 68.97 35.91 1,162 8,160 2,101 5,120 -7.62 -20.23 -24.78 -13.22 Value 1.33 77.35 1.55 YTD chg/% -0.57 4.87 -0.83

AViVA iSSuES boND AftER ANNuity SHoRtfAll. The U.K. insurer’s unscheduled $400 million bond will help shore up regulatory capital after a decline in bond yields. (page 2)

itAliAN iNSuRERS fACE CAPitAl PRESSuRES, DowNgRADES oN SoVEREigN RiSk. The three largest Italian insurance companies say they lost a combined 5.5 billion euros ($7.34 billion) in capital in the first nine months of this year. (page 3) VolAtility wAtCH. Banks benefited from Italian sovereign credit-default swap hedges against potential writedowns. Sugar price declines prompted hedging increases. (page 5). RiSk iNSigHt. Adam Litke on the Volcker Rule’s remaining loopholes and implementation difficulties. (page 6) CDS iNDiCAtoRS. Core EU sovereigns including Germany were the worst performers this week, along with German and Austrian banks and French non-financials. (page 7) iN CoNVERSAtioN. PenSam’s Andersen on hedging for tail-risk and the separation of alpha and beta. (page 10)

EADS Boosts FX Hedges, Plans Currency Change

European Aeronautic Option Vol, Basis Swaps Increase Dollar Costs Defence and Space Co. 0 20 NV, the part-owner of air18 -20 craft company Airbus SAS, 16 -40 is pressing its clients to pay 14 for aircraft in euros rather -60 12 than dollars, a move that 10 -80 reflects the tougher environ8 -100 ment for dollar financing 6 Euro/dollar 3m ATM Vol -120 and hedging. (LHS) 4 -140 3 month Euro/dollar basis The company is seek2 swap (RHS) ing to reduce its dollar0 -160 24/08/2009 24/02/2010 24/08/2010 24/02/2011 24/08/2011 denominated exposure by switching the currency of its contracts with airlines into in dollars. EADS has a $71.8 billion euros, Hans Peter Ring, chief financial portfolio of foreign currency hedges in officer of EADS, said on a Nov. 10 earn- place to manage its exposure to dollars ings call. through such contracts. “In addition to our traditional hedging The company has been increasing its activity, contracting with several airlines use of options rather than forwards to inin euro is progressing,” Ring said on crease its hedging capacity with banks, the call. “We’ve talked about that before and a move into euro contracts would and we can confirm now that we are help to manage its dollar exposure. moving into the right direction here.” Many European airlines have to hedge The move is an attempt to move away their European exposure, after securing from the typical practice of most aircraft continued on next page
Volatility (percent) Basis points











. — Radi Khasawneh 1 2 3 4 5 6 7 8 9 10 .’s failure to hedge sufficiently against a plunge in U. estimated that the airline uses French banks for 13 percent of its financing.S. and said that the environment had become more difficult. citing confidentiality agreements. At the end of last year. “This higher rate perhaps reflects the unexpected nature of this issuance and the need to do so on short notice. Lufthansa declined to comment on its contracts with Airbus. without giving further +44-20-3216-4818 Radi Khasawneh rkhasawneh1@bloomberg.5 212-617-2309 Nick Dunbar ndunbar1@bloomberg. and Lufthansa placed orders and commitments for 30 A320 and two A380 planes. it has 2 billion pounds of the +44-20-7673-2763 Alberto Fuertes afuertes@bloomberg.75 percent. have announced that they are exiting businesses such as aircraft financing after seeing large declines in the availability of dollar funding. Aviva +44-20-3525-8364 Nick Ferris nferris2@bloomberg.9 billion euros of dollar-denominated commitments for flight equipment due over the next four years. The company said it converted the dollar amounts into euros through swaps on the closing date of agreements. Philippe Calavia. Aircraft financing leases often involve a level of participation or subsequent lending by the bank. the leases for the two A380 planes involve a co-investment from the bank. based in Iowa. EADS increased its foreign exchange hedges by $1. Air France signed a commitment for 60 A350 planes from EADS. That increase would be 215 million pounds ($333 million). 16. The company enters into hedges for 50 percent of the cur- rency risk when the contract is signed. index-linked policies at the end of last year.S. the company said in a statement on its website. said in a report published on Nov. Those bonds paid investors a coupon of 5. At the end of last year. according to its annual report published on March 717-505-9701 Risk Editor Reporter technical Editor Newsletter business Manager Advertising Reprints & Permissions To subscribe via the Bloomberg Professional Terminal type BRIEF <go> or on the web at: www. according to EADS results.. the company had $744 million in currency hedges in place for 2011. according to thirdquarter results filed on Nov. 10. The bonds would be used for general corporate purposes and the proceeds would count for regulatory capital purposes. In the third quarter. 212-617-6975 Lori Husted lori. customers.husted@theygsgroup.Bloomberg.S. “We are surprised by the anticipated coupon of 8. bloomberg brief Risk Newsletter Executive Editor Ted Merz tmerz@bloomberg. subsidiary. which represented 91 percent of its aircraft commitments. Since then. according to a Moody’s ratings announcement for the new bond. NEwS Aviva’s ‘Unexpected’ Bond Addresses Annuity Shortfall U.” Calavia said on a Nov.” Aviva had 20 billion pounds of liabilities linked to its U. This newsletter and its contents may not be forwarded or redistributed without the prior consent of Bloomberg. Lufthansa had hedged more than 80 percent of its payments due under financing agreements. even though it’s never a good sign for us to see the number of players providing financing is © 2011 Bloomberg LP. Two of EADS’s largest orders for aircraft in Europe were from Air france-klM group and Deutsche lufthansa Ag. The company didn’t disclose changes to statutory capital for its annuity business in its third-quarter results. Air France has 1. insurer Aviva Plc.25 percent to 8. according to thirdquarter results.” CreditSights ltd. Aviva hedges the interest payment for its index-linked annuity policies with derivatives. according to a presentation given to analysts on Nov. It sells the policies through its U.K. “There are alternatives that can be drawn upon. The bond issue may help pay for an increase in the company’s regulatory provisions for index-linked annuity policies that offer a capital guarantee. which seems very high for an AA-range issuer. The company has increased its use of option collars by $1 billion in an effort to reduce its cost of hedging. Aviva first announced a $200 million subordinated bond before doubling its size at pricing on Nov. which ratings company Moody’s investors Service noted was a higher cost of financing than the 800 million-euro subordinated bond it had called earlier in the week.49 billion euros. 14.6 billion over the first nine months of the year. which have a 20 percent share of this market. and builds that up over time. The 30-year bonds paid a coupon of 8. which total $5. All rights reserved.11 Bloomberg Brief | Risk 2 eads boosts fx hedges. French banks. 11 third- quarter earnings call.25 percent. According to Lufthansa’s annual report. bond yields likely prompted the company to issue an “unexpected” $400 million bond that shores up regulatory capital held against annuity policies it sold to U. continued from previous page aircraft financing denominated in 212-617-6975 bbrief@bloomberg. which it hedges on a rolling 24-month basis.25.S. according to Bloomberg estimates based on sensitivities published in its 2010 annual report and year-to-date declines in the 10-year dollar swap rate. which pay interest based mainly on the Standard & Poor’s 500 Composite Index. chief financial officer of Air France. Please contact our reprints and permissions group listed above for more information. depending on the prevailing exchange rate.11.

and off-exchange traded derivatives – you make better use of your collateral and capital. Europe’s leading clearing house for securities and derivatives transactions.11 Bloomberg Brief | Risk 3 Eurex Flexible 1 2 3 4 5 6 7 8 9 10 . We know that sometimes you need the flexibility that only offexchange trading can provide – allowing you to hedge a complex portfolio with greater precision. www. They let you customize your trade bilaterally. evaluates your market exposure in real-time – across all your positions in on. be flexible with your options.25. So in the future. Trade like OTC. protected by CCP.11.eurexchange. That’s where Eurex’s Flexible Contracts come into play. but with all the benefits and safety of central counterparty clearing. And because Eurex Clearing.

Williams will report to Chief Executive officer Mike Smith. Australia’s third largest bank by market value. The ratio has been affected by declines in government bond prices and equity markets. 10. – Radi Khasawneh For Web News on Hedge Managers on Bloomberg click {STNI HEDGEMANAGERSWEB <go>} 1 2 3 4 5 6 7 8 9 10 . 17 filing with the Australian Stock Exchange. according to a Nov.” Picagne forecast that the company will be downgraded as a result. The reduction in its capital has meant the company is seeking changes to the way the existing solvency regulations are applied in Italy. 15 rating report. and with declines in Italian government bond prices the solvency ratio can only deteriorate. Italian government bonds enjoy a zero risk-weighting under both the Solvency I regulations and the proposed Solvency II regulations. 16. Italian Insurers Face Capital Pressure. according to Michel barnier. 13 report. Bostock had been due to join lloyds banking group Plc as head of wholesale banking in a move announced on July 19. Generali was the lowest among the four.” said CreditSights ltd. “The main issue with Generali is that it is relatively undercapitalized and will eventually have to deal with that. he joined RBS from Abbey National Plc in June 2009 as head of restructuring and risk. when ANZ bought National bank of New Zealand from lloyds tSb group..K. “A lot has happened since the end of September. The company will take action “in the shortest period possible” to restore its solvency margin to 120 percent. The company is currently rated BB+ by Standard & Poor’s and Fitch. this week reversed an earlier decision to leave the bank. ON THE MOvE RbS’s bostock Decides to Stay on as Risk Chief Nathan bostock. who will retire after three years in the role on Dec.9 billion-euro portfolio of Italian government bonds that have an average duration of seven years. according to a press release from the bank. Generali would need an extra 5 billion euros of capital in the event that Solvency II rules were changed to reflect the same charges for corporate bonds outlined in the latest quantitative impact study.. . analyst Philippe Picagne in a Nov. It is currently rated AAby Standard & Poor’s and fitch Ratings. 11.3 billion euros ($5.7 billion-euro portfolio of Italian government bonds because of the much shorter duration of its portfolio. suffered a 6. in a speech given in Berlin on Nov. 21 said. the largest Italian government holder among the insurers. the name of Italian bank Unione di Banchi Italiane SpA was mis-spelled. particularly in the charge applied to available-for-sale real estate assets.1 billion euro decline in its value based on its own embedded-value calculation in the third quarter. “After careful consideration of his position Nathan has decided to remain in his current role as chief risk officer at RBS. fondiaria-SAi SpA was forced to raise capital and was subsequently downgraded to junk status.8 percent capital charge. Asset Protection Scheme portfolio. while the largest insurer Assicurazioni generali SpA said it was seeking regulatory relief and is facing a likely downgrade. when he moved to Australia from New Zealand.11 Bloomberg Brief | Risk 4 News.” a regulatory filing from the bank on Nov.25. 15. Net exposure to Italian government bonds as a percentage of shareholder equity is pronounced for all three insurers. with a negative outlook. according to an earnings call. Fondiaria raised 800 million euros of capital during the third quarter. A subsequent decline in Italian government bond prices has caused a further 1 billion-euro decline in its embedded value. commissioner in charge of internal markets regulation. The capital raising was intended to bring up that number to more than 125 percent. Fondiaria has a solvency I ratio of 111 percent after falling below 100 percent to 97 percent at . it said in a statement on its website published on Nov. That in turn has reduced the company’s economic solvency ratio – which includes the effect of market moves – to 120 percent from 126 percent between the end of the third quarter and the call. The charge is calculated on Generali’s 51. with responsibility for managing asset sales and the U. Chief Financial officer Raffaele Agrusti said on a Nov. according to figures published by barclays Capital in September. according to analysts. Correction on last week’s issue: In our front-page story.7 billion) in capital in the first nine months of this year after coming under pressure because of declines in Italian government bond prices and equity markets. the company said in third quarter results on Nov.11. Italy’s second-biggest insurer Mediolanum SpA would only need 164.4 the end of the last year. The European Commission is reviewing the presumption of a zero risk-weighting on government bonds issued by members of the organisation for Economic Co-operation & Development. Downgrades The three largest Italian insurance companies say they lost a combined 4. which are set to come into force in 2014. and Allianz SE’s Chief Financial officer oliver Beate was incorrectly described as being the chief risk officer. Royal bank of Scotland group Plc’s chief risk officer.5 million of additional capital on its 4. he joined the bank in 2004. 18. 11 earnings call. By contrast. according to third-quarter results filed on Nov. before being downgraded to junk status by Standard & Poor’s on the company’s “increasingly constrained capital adequacy and solvency position” the ratings company said in a Nov. Generali. ANZ Promotes williams to Chief Risk officer Nigel williams has been appointed chief risk officer at Australia & New Zealand banking group ltd. Williams will replace Chris Page. with net Italian government bond exposure accounting for 65 percent of shareholder equity.. according to Bloomberg estimates based on a 9. with Italian insurance companies the most leveraged to their own government debt among Southern European countries. Williams has been a managing director in charge of ANZ’s Australian institutions business since 2008.

25.11. to start hedging the commodity after a period of volatility and rising costs. Copper Price Declines Trigger Hedging Gains Falling Sugar Prices Prompt Rise in Hedges Copper mining companies reported hedging gains during the third quarter and plan to extend the maturity of their hedging portfolios after a 29 percent decline in prices in August and September. especially in the third quarter. assuming that the notional value of the Italian CDS held did not change in each quarter and the contracts had a five-year maturity.6 million-euro gain on the new derivatives in the third quarter and still predicts its input costs will increase in 2012. Deutsche bank Ag has had a gain of $507 million since June. The company had a 0. were $340 million and $183 million respectively. The copper spot price increased 4 percent since the beginning of october. 1 2 3 4 5 6 7 8 9 10 . the gains for ubS Ag and bank of America Corp. UBS’s net notional position increased from 1. Southern Copper Corp. Futures data show traders do not anticipate changes in copper prices in the coming months. according to an earnings call. hellenic’s new hedging policy is designed to manage exposure to sugar-price volatility. with the CDS curve inverting and the one-year maturity contracts being the most expensive. Under the same assumptions. By contrast.000) gain from its hedges in the third quarter.6 billion francs in the fourth quarter. taseko Mines ltd.7 million gain due to its copper hedges in the third quarter and will maintain its hedging position in the fourth quarter and the first quarter of next year. according to a company earnings call. Brazil’s largest beer company. Sugar spot prices have fallen 12 percent since July and the futures curve indicates small price declines are expected in the future. The historical term structure showed signs of distress in the Italian CDS market in the last two weeks. hellenic previously relied on building inventories and fixed-price contracts to manage risk. according to the company’s quarterly report.3 million real in the same quarter last year.3 million-real ($170. Declines in sugar prices have prompted companies such as Hellenic Coca-Cola bottling Company S. according to corporate filings. according to Bloomberg Brief estimates.A. also reported gains on its sugar hedges in the third quarter. Companhia de bebidas das Americas (AmBev). The net notional positions for Deutsche Bank and Bank of America experienced little change. Those hedges counterbalance potential writedowns on the banks’ exposure to sovereign Italian bonds and loans.11 Bloomberg Brief | Risk 5 vOlATIlITy wATCH By ALBERTo FUERTES Banks Benefit from Italian Sovereign CDS Hedges Banks that reported holdings of Italian sovereign debt credit-default swaps have profited from mark-to-market increases in the value of the contracts in the second half of the year. reported a $48 million gain on copper derivatives in the third quarter and said it will extend its copper price protection program into 2013. the company lost 13. reported a $20.9 billion Swiss francs ($2 billion) in the third quarter to 3. AmBev had a 0.

S. In today’s environment. the regulation starts with the standard definition of the trading book under the market risk rule. The most surprising thing about this section of the rule is that interest rate swaps are not exempt. Many market participants will object that this is a huge imposition in an attempt to fix a problem that did not exist in the first place. the law stands. hedging and market making. All loans. These are underwriting. It makes no sense to allow a bank to provide bridge. market making.— Unless otherwise provided in this section. This is more a matter of politics than of risk. This is both self serving and an acknowledgment of economic reality. hedging. lend long model that has existed since banks were invented. The rule recognizes this and it is encouraging that it is not prescriptive in the determination of when a trade is proprietary. is allowable. we do not have enough historical data to make the distinction today. For the purposes of the following discussion this is all irrelevant. those of form and those of intent. banks are allowed to freely engage in loan trading. Market making is probably the most complicated area to police. It then exempts certain positions as the law requires. It is easy to see what is going on in liquid markets such as equities. derivatives are in the political dog house and it would be the brave regulator indeed. how could the regulators argue that hedging activity is a bad risk? The rule rightly states that hedges should be undertaken in the business unit that had the risk. recall the current problems with the euro. This note will only address two items: the loopholes that remain and difficulties in implementation.11. Ambiguities will Make Policing.11 Bloomberg Brief | Risk 6 RISk INSIGHT CoMMENTARy By ADAM LITKE volcker Rule’s Exemptions. Spot commodities and foreign exchange are exempt for more complex reasons. banks can enter into term repo facilities on risky debt. Commodity trading is already highly restricted at banks and it is unlikely that keeping the exemption for spot commodities while restrictions remain in place for commodity derivatives will allow banks much leeway for speculation. Thus. a trading position in distressed debt.” This short sentence has spawned an enormous rule making. While this may be possible in the long run. running to 126 pages in the Federal Register. There are two categories of exemption. This leaves two enormous loopholes for risk taking. The reasoning seems to be that since banks are in the business of making loans then we can’t restrict loans trading. other markets are more problematic. they are allowable. Most of the record keeping is something that any good trading firm will do for its own purposes. As in the recent case of MF Global. no matter how large. They are much riskier than equities or high yield debt. from repos to straight debt are exempt. a banking entity shall not — (A) engage in proprietary trading. only the legal form of the instrument matters. The extra duration risk taken by a trading book is immaterial relative to the duration risk in the banking book. Traders are often asked to take positions that they cannot immediately offload. Except in cases of common currency. Barring a new act of Congress. This is the basic borrow short. Spot foreign exchange is simply cash. Any hedges at the corporate level must have strict governance. Compliance a Challenge Section 619 of the Dodd-Frank Act says “PRohIBITIoN. Banks play an important role in capital formation. Making the distinction between proprietary trading and authorized bank activity is virtually impossible. This does not make the new rule perfect. Underwriting and hedging are obvious. government and agency bonds including those of Fannie Mae and Freddie Mac. George Soros made his reputation as a proprietary trader by “breaking” the pound. not proprietary risk taking. Risk managers at banks have long been leery of currency positions in emerging markets. Any bank doing business in multiple countries can easily make the case that any currency position it has is the result of either hedging or not hedging its home currency earnings. interest rate swaps and government bonds.S financial institutions at a disadvantage when competing with foreign institutions. By itself this is not a bad thing. It doesn’t matter if the loan was purchased on the open market or sourced directly from the borrower. Exemptions of intent include underwriting. who tried to make a distinction between simple products and the proverbial volatile cocktail of risky derivatives. It presupposes that the regulators will be able to use large amounts of statistical data to determine the intent of the trader. Banks have always taken significant interest-rate risk on their balance sheets.25. This doesn’t mean it isn’t risky. The law prohibits proprietary trading. loan trading and spot foreign exchange and commodities trading. A large section of the rule is devoted to record keeping and risk reporting intending to create the data to analyze the sources of profit and loss. the government knows that if it fails it will be in no position to bail out banks holding government debt. The real problem with this part of the rule is that it is a bit premature. Forcing foreign exchange transactions into clearing houses has proven impossible and exempting foreign exchange trading from proprietary trading regulation equally capital to a company but not allow the bank to participate in the takedown and sale of the corporate bonds. government bond trading. Exemptions of form start with the one for U. While a bank cannot take a speculative position in an investment grade bond. Even developed currencies can be subject to bouts of currency speculation. others will argue that the rule puts U. The first few years of the rule will likely see many arguments about exactly where the line is between market making and proprietary trading. 1 2 3 4 5 6 7 8 9 10 . The final exemption of form is the most surprising. he would be quite surprised to find out that this wasn’t proprietary trading. Even more important. Since loans are not marked to market and are technically not in the trading book.

55 101.14 24.43 A2/A/A Baa2/-/Aa3/A+/A+ Baa2/BBB/BBB+ A1/A/A Baa1/BBB+/AAa2/A+/AA+ A2/A+/A Aa3/AA-/A+ Caa1/-/CCC+ 1.81 -34.22 27.08 808.11 53.22 0.946 4.74 324.166 233 575 <128 <128 <128 <128 <128 761 246 3% -11% -16% 3% -8% -19% 1% -63% 24% 5253 1256 274 257 2338 1796 294 5305 357 667 Ca/CCC/CCC -79.20 -96.24 Ba2/BBB/BB+ Aa3/A/A+ A2/A/A+ Caa2/B-/CCC Caa2/BB-/CCC Ba1/-/BBB+ Ba3/BBB/BB Baa2/BBB/BBB+ Ba3/BB-/B+ Highest Lowest * Moody's/Fitch/S&P * DTCC 1 2 3 4 5 6 7 8 9 10 .56 A1/A+/A Aa3/A+/AABa2/BB+/BB Ba2/BB+/BB Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aa1/AA+/AA+ Baa1/BBB/BBB Aaa/AAA/AAA 4.54 79.98 -13.343 556 <128 5.19 0.61 -86.36 -80.28 18.83 167.159 1.00 30.03 79.64 15.15 -6.658 -29% 10% -11% -25% -27% 5% -11% 75% 9% -32% A2/A+/A A1/A+/AAA1/AA-/AABaa3/BBB-/BBBBa2/BB+/BBBB1/B/B Ba1/BBB+/BBB+ A1/A/A+ Baa1/BBB/BBB+ Baa3/BBB-/BBB- Highest Lowest * Moody's/Fitch/S&P * DTCC financials 5Y Issuer: Best Performing Residential Capital LLC Bank of Ireland Sumitomo Mitsui Banking Corp Suncorp Group Ltd Alpha Bank AE Irish Bank Resolution Corp Shinsei Bank Ltd Allied Irish Banks PLC Nomura Securities Co Ltd Halyk Savings Bank of Kazakhstan Issuer: Worst Performing Intesa Sanpaolo SpA BAWAG PSK DnB Bank ASA XL Group Plc Erste Group Bank AG SNS Bank NV Berkshire Hathaway Inc Commerzbank AG Deutsche Bank AG Radian Group Inc Source: Bloomberg 614 400 198 226 645 445 228 325 293 4442 20.35 225.17 63.79 121.29 6.73 3.78 62.363 1.02 0.805 1.05 -27.66 25.31 24.931 13% 108% 7% -23% 174% 6% 43% -2% 10% -6% 554 186 481 605 1102 441 761 204 213 188 -2.67 26.518 2.747 -10% -11% -8% -22% continued on next page CDS WTD Chg % -29.16 70.84 151.97 -1.96 13.974 4.25.79 303.87 83.38 172.61 -42.05 15.50 621.50 -81.35 174.58 -30.43 -37.15 5.99 49.72 4.086 19.56 27.64 325.46 206.08 -73.42 -88.541 5.36 115.34 118.55 16.59 13.30 22.906 5.122 989 15.70 87.54 -0.87 165.26 185.71 -18.02 0.82 -4.11 Bloomberg Brief | Risk 7 CREDIT DEFAUlT SwAP INDICATORS Sovereign 5Y Issuer: Best Performing Republic of Italy Czech Republic Kingdom of Spain Republic of Hungary Portuguese Republic Lebanese Republic Republic of Ireland State of Israel Thailand Republic of Colombia Issuer: Worst Performing Republic of Korea People's Republic of China Republic of the Philippines Republic of Turkey Commonwealth of Australia Kingdom of the Netherlands Federal Republic of Germany Kingdom of Belgium Russian Federation Kingdom of Sweden Source: Bloomberg 177 166 233 318 98 135 111 395 288 83 12.655 2.55 127.11 16.296 3.67 -56.39 20.56 0.310 2.11.24 -0.522 5.57 12.36 64.994 <128 328 1.14 1.79 167.13 66.66 64.47 22.15 129.98 14.25 84.275 1.68 8.71 Credit Rating * Net CDS Notional * USD m YoY Chg 20.05 130.03 92.25 934.47 373.41 -55.33 0.69 1.06 30.22 0.84 32.53 146.664 511 3.50 -43.89 69.93 -68.65 56.533 2.98 72.15 121.75 168.39 32.43 164.941 9.91 YTD % 866.87 CDS WTD Chg % YTD % 5y Benchmark asset swap spread 484.24 -72.54 97.97 -8.75 17.52 33.82 7.04 -0.33 -1.033 5.62 Equity YTD% Credit Rating * Net CDS Notional * USD m YoY Chg 1.

84 49.85 -3.42 25.11.34 -0.76 -75.77 22.686 701 2.29 -43.43 107.51 314.54 112.26 24.37 16.76 -8.48 24.25.66 4.405 1.61 221.17 -81.37 -2.21 131.50 21.328 1.54 22.664 1.682 852 876 0% -12% -13% -9% -13% 6% -6% -20% -17% CDS WTD Chg % YTD % Equity YTD% Credit Rating * Net CDS Notional * USD m YoY Chg Highest Lowest * Moody's/Fitch/S&P * DTCC Financial intelligence BRIEF Click here for your free trial. 1 2 3 4 5 6 7 8 9 10 For Industry InsIders .29 Ba1/BB/BB+ Aa3/A+/AAB2/-/B A1/-/A Baa1/-/BBB Baa2/-/BBB B3/B+/B+ A2/A+/A B3/B-/CCC+ Ca/C/CCC 573 <128 808 2. continued from previous page Non-financials 5Y Issuer: Best Performing Clear Channel Communications Temple-Inland Inc Reed Elsevier PLC Matsui Securities Co Ltd Gas Natural SDG SA Iberdrola SA Enel SpA Safeway Ltd Black & Decker Corp Campbell Soup Co Issuer: Worst Performing Tesoro Corp EDF SA Sabre Holdings Corp GDF Suez Alstom SA Glencore International PLC Sprint Nextel Corp Hewlett-Packard Co Meritor Inc Caesars Entertainment Operating Source: Bloomberg 381 193 1415 187 323 545 1182 142 1462 3697 20.12 -33.24 56.70 178.09 -10.10 30.65 24.71 27..11 Bloomberg Brief | Risk 8 Credit default swap iNdiCators.89 190.05 -24.69 -0.26 -21.77 3.96 -1.819 1.93 -7.17 195.01 15.07 Ca/C/CCCBaa3/-/BBB Baa1/A-/BBB+ -/-/Baa2/A/BBB A3/A/AA3/A/AA3/-/Baa1/A-/A A2/A/A1..196 1.408 -24% 8% -15% 18% -6% 8% 15% 28% 2336 47 88 299 292 298 384 69 52 56 -11.61 -38.81 -27.21 -1.081 <128 1.08 -4.67 -3.81 231.453 2.191 467 1.53 29.90 193.16 22.15 62.92 -41.34 31.48 42.05 -37.18 -9.52 65.910 1.06 -41.30 -2.

08 0.46 GOLD SPOT $/OZ 0.12 1.47 -0.48 0.34 1.72 -0.10 0.61 MARKIT ITRX EUROPE 06/16 -0. 1 2 3 4 5 6 7 8 9 10 .34 -0.29 0.00 0.12 0.67 -0.00 -0. S/A) as of 25/11/2010 US Dollar Swaps (30/360.43 -0.78 0.03 0.00 -0.29 0. Credit indexes and gold both showed increased correlation with equity indexes.500 1.07 -0.45 0.60 MARKIT EUR SWAP CDX.72 -0.27 -0.500 0.000 1.05 0.24 -0.59 -0.27 1.20 0.000 Japanese yen Swap 2.75 0.58 0.41 0.59 0.07 -0.31 0. S/A) as of 25/11/2011 10Y 15Y 20Y 30Y 2.500 4.000 3.59 -0. yen swaps experienced a steepening from the 2-year term.62 MSCI EM INDEX 0.25 -0.28 Column1 CRUDE OIL FUTURE 0. one year ago and five-year average Euro Swap 4.62 0.000 0.70 0.45 0.70 0.500 0.000 1M 1Y 3Y 5Y 8Y British Pound Swaps Curve 5Y Average British Pound Swaps Curve as of 25/11/2010 British Pound Swaps Curve as of 25/11/2011 10Y 15Y 20Y 30Y 1.500 4.000 0.52 0.00 EUR-USD X-RATE USD-JPY X-RATE USD-GBP X-RATE EUROSTOXX 50 INDEX S&P 500 INDEX MSCI EM INDEX MARKIT ITRX EUROPE 06/16 MARKIT CDX.50 0.500 4.66 -0.74 0.20 -0.27 0.16 ANNUAL 06/16 10 YR -0.000 0.34 -0.000 1.00 0.36 1.51 -0.00 0.33 -0.00 0.62 0.20 -0.12 -0.500 3.41 0.54 -0.40 0.NA.41 0.000 3. correlation between USD/GBP and S&P 500 reached a record high this week at -0. S/A) 5Y Average US Dollar Swaps (30/360. with a net decrease on the 2y-10y spread of 14 basis points for the sterling swaps.65 0.000 10Y 15Y 20Y 30Y Sterling and dollar swaps flattened from the 18-month term and 7-year term respectively.37 0.500 2.000 10Y 15Y 20Y 30Y Sterling Swap 5.16 06/16 EUR SWAP ANNUAL GOLD SPOT $/OZ CRUDE OIL FUTURE 10 YR The correlation between EUR/USD and S&P 500 and Euro Stoxx 50 indexes reached record highs.500 1.53 -0.40 -0.43 0.60 -0.54.000 0.NA.25.72 0.81 0. three-month correlations one year ago are displayed above the diagonal EURUSD XRATE 1.81 -0.000 3.67 0.42 0. Also.72 1.02 -0.000 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 1.000 2.00 -0.07 -0.38 -0.36 1.42 1.56 0.500 4.500 Japan Yen Swaps Curve 5Y Average Japan Yen Swaps Curve as of 25/11/2010 Japan Yen Swaps Curve as of 25/11/2011 1M 1Y 3Y 5Y 8Y 0.74 0.000 3.70 -0.07 0.48 -0.40 0.46 -0.66 1.01 -0.11.71 -0.26 -0.IG.14 -0.500 3.58 -0.00 0.49 1.11 -0.11 -0.48 0.90 -0.500 0.53 -0.23 -0.32 -0.78 -0.11 Bloomberg Brief | Risk 9 yIElD CURvE DEvIATIONS Dollar Swap 5.43 -0.000 2.20 -0.000 2.500 1.500 2.65 0.500 2.68 -0.14 0.000 Current vs. CROSS-ASSET CORRElATIONS Three-month correlations of daily returns are displayed below the diagonal.59 S&P USDUSD-GBP ESTOXX 500 JPY XX-RATE 50 INDEX INDEX RATE -0.000 1M 1Y 3Y 5Y 8Y US Dollar Swaps (30/360.13 -0.00 -0.52 0.IG.48 0.49 0.500 1.28 0.58 1.00 0.02 0.500 4.

trying to find out whether there are embedded possibilities of gaining a high return. on a forward basis. Five-into-10-year forward rates were close to 5 percent. A banker advised me to me to change my view and I did. After that learning phase. In fact. Thirty to thirty-five percent is in 3 percent and the rest is in zero guarantees. I will say that there was a London bank that called me. used a hedging strategy that still allowed me to outperform if rates went up. he tells Bloomberg’s Nicholas Dunbar about the separation of alpha and beta. quite significantly. on Nov. Where we couldn’t remove linear risk through swaps or futures. Q: How do you think about risk and return? A: When setting the strategic-asset allocation I use risk-neutral return expectations – I’m trying to get to the long-term horizon by surviving the short-term horizon. looking at potential outcomes on the upside and the downside and the probability for these scenarios. We find that equities are the most risky asset class. The bottom line is that I made 3 percent outperformance on AUM from this strategy and increased the solvency of the company. he was the clever guy. Q: it seems that Denmark’s mortgagebond market is a good training ground to learn about hedging and options.what is PenSam’s exposure? A: The 4 percent interest-rate guarantees account for roughly 50 percent of the fund. and every time I expected something to go up it went down. I simply don’t understand how you can do that. the zero percent. you should start from the asset-class level. so people could understand which factors to hedge out i. you’re dead. Q: there is a rumor that you entered into this strategy upon the advice of Morgan Stanley.11. floors and swaptions to remove the negative convexity. 18.I’m just trying to harvest the risk premias and to protect my profit from market moves. Which factor is giving you the return and which ones are not? I built up a performance-attribution model. where the average guarantee is 3 percent. Q: Danish pension funds have a legacy of offering high fixed-rate guarantees to members . I’m not cleverer than the market .11 Bloomberg Brief | Risk 10 IN CONvERSATION PenSam’s Andersen on Tail-Risk Hedging. we constructed things in a certain way to hedge tail risk. I have a huge problem in equities if they surprise on the downside. Needing to hedge. the Dangers of Alpha benny buchardt Andersen is chief investment officer of PenSam. That’s how you make a ton of money. and should be uncorrelated to the beta of asset classes. and all new money comes in on the zero and 3 percent guarantees. has 29 percent in equities. There was a time when I ran fixed income at a different fund. is that true? A: I won’t comment on the identity of our dealers. investing in new asset classes. 1 2 3 4 5 6 7 8 9 10 . 15 percent in alternatives and the rest in investmentgrade bonds .5 percent or about 50 million euros for our fund. or low as 7-11 percent. I made a return that more than compensated for the loss compared to my benchmark on equities where we had a negative return of 15 percent. Then you should look to yourself: do I have enough skills such that you can leverage that and actually insulate the alpha? Academics say that alpha is about skill-based investment. Q: would you describe this year’s performance as being due to alpha or beta? A: I would say our tail risk hedge was a good beta investment. otherwise I can’t get the asymmetric return profile. and that has 26 percent in credit. we used caps. the profit stood at 713 million euros. rates had actually increased.25. but I still expected spot rates to go up but at the same time needed to “take profit” So I . At the beginning of the year I expected rates to go up. Q: How much did you make? A: We bought euro swaptions on 30-year swaps that were 50 basis points out-of-themoney where the yearly premium cost on the gross assets is 0.3-0. because you’re taking a ton of basis risk trying to remove the beta risk. Then we looked at the forward rates in March. A: Investing in Danish mortgages is complex because of the negative convexity due to them being prepayable. We try to increase returns by making tactical bets. we have the lowest allocation to equities . Swaptions.only 14 percent in traditional Danish mortgages. That is how I manage the overall investment risk.e. we started to perform again. So what I do is to focus on risk diversification in the investment portfolio. If you don’t understand it or have the skills to identify it. how did your thinking evolve? A: Looking at mark-to-market of our liabilities. in 2011. you get a double benefit: from rates going down and from volatility increasing. the ones giving negative alpha. So I said we have to rethink this. Alternative investments are between 20 percent and 30 percent due to a high allocation to real estate and also an increasing allocation to private equity. we find that equity is a minimum of 60 percent of my VaR. looking for call-option features. The highinterest guarantees are now 100 percent hedged. so I was underweight duration. and the swaption tail-risk hedge that earned his fund 700 million euros in the space of a few months. you can be killed by that. We like to think we are at the forefront of hedging our interest-rate guarantees. but increased my exposure to receiver swaptions if I made a mistake and rates did go down. The one having the highest risk capacity. We have to find a way of going for the upside while being protected on the downside. combining the effect of rates going down and volatility exposure. the convexity goes over a cliff it’s dramatic. Allocating 20 percent to equities and 60 percent to high-yield bonds. no matter how we do it. Why take a huge risk just to benefit from rates going up when they already had gone up and the probability of rates going down had increased? I try to benefit from both worlds and I need swaptions for that. asking me to look at the forward rates instead of the spot rate. the 11 billioneuro Danish healthcare workers’ pension fund. Q: And the asset allocation for the different entities? A: In the high-guarantee funds. you could say that the guarantees forced us to hedge. and vice versa. when you calculate what happens when rates go to zero. Q: the high guarantees mean that your downside is particularly severe when bond yields are low.