CRDB BANK LTD The Bank that Listens

1. CRDB BANK LTD The Bank that Listens

2. Presentation to Clients on KYB Cotton Workshop 14 March 2005 Mwanza By KYB Team and CRMG

3. Outline • Introduction: Product Concept & Principal • How it works • Experience • Timing • Pricing • Transaction Flow • Important Documentation • Closing the Contracts • Way Forward

4. Introduction • CRDB Bank and CRMG - World Bank partnered 2 years ago to develop and offer Kinga Ya Bei (KYB) to clients • KYB offers opportunity for farmers/ exporters to hedge against price risk for their physical products through the world financial market for futures and options. • CRDB & CRMG assist in risk exposure assessment while CRDB also serves as market intermediary in purchase of KYB

5. Risk Exposure If you – • Sell before you Buy, OR • Buy before you Sell You have risk. Risk Assessment

6. Risk Positions • Long position • Purchase before selling • Risk is market will move up • Short position • Sell before purchasing • Risk is market will move down

7. Breakeven Analysis - I • Determine the price you need to protect by determining you breakeven point

8. Adding in Costs to Determine Protection Price

9. Breakeven Analysis - II • Determine the price you need to protect by determining you breakeven point

10. Adding in Costs to Determine Protection Price

11. Option Contract • Definition: • A tool that provides price protection on the global market (New York) • It can protect a global price minimum or a global price maximum for a cost (premium). • The right to buy or sell a futures contract within a specific period of time at a specific price level (exercise price).

12. How does it work? Options Contract – Simple Example: in June … • Ginner purchases or sets price for cotton in June • Ginner does not know the market prices from Sept – March when cotton sales are made

13. What should be done? In June: • Can purchase option contract for Sept-March to protect global market price from going down • Will have a chance to select strike price to be protected • Have to pay premium as the purchase cost

14. Throughout Sept – March As ginner fixes price on sale of physical cotton, can settle or sell option contract to close it If prices have fallen below strike price, union receives the settlement price which is close to the difference between market and strike price when the option is closed

16. Transaction Flow Purchase or Price Cotton with Farmers Pass Cotton Through Gin Sell Cotton to Buyers Physical Transaction Purchase a Put Option Contract Close out position Financial Transaction

17. Timing • The purchase and sale of options contracts must be linked to the purchase/sale of your physical stock • Buy protection immediately when you have bought/sold the physical stock • Sell protection immediately when you have sold/bought physical stock

18. Pricing • The price of options contracts changes every day/ minute • The cost of the option contract is like an insurance premium • Once you pay it you will not get it back • The broker and CRDB both add small commission • The cost of the option is quoted in dollars per pound (LB) • Multiply by quantity • Currency Risk

19. MONTH STRIKE $/ lb P/C PRICE$/ lb Jul  2005  .48 P .01 Jul  2005  .49 P .0126 Jul  2005  .50 P .0158 Jul  2005  .51 P .0194 Jul  2005  .52 P .0234 Jul  2005  .53 P .0280 MONTH STRIKE P/C PRICE Oct  2005  .50 P .0179 Oct  2005  .51 P .0212 Oct  2005  .52 P .0249 Oct  2005  .53 P .0289 Actual Costs with Cotton Market (NYBOT) at $.53 11/3/05 {Level of Protection} {Type of Protection} {End of Protection} {Price of Protection}

20. AN EXAMPLE

21. Breakeven Analysis - I • Determine the price you need to protect by determining you breakeven point

22. Adding in Costs to Determine Protection Price

23. MONTH STRIKE $/ lb P/C PRICE$/ lb Jul  2005  .48 P .01 Jul  2005  .49 P .0126 Jul  2005  .50 P .0158 Jul  2005  .51 P .0194 Jul  2005  .52 P .0234 Jul  2005  .53 P .0280 MONTH STRIKE P/C PRICE Oct  2005  .50 P .0179 Oct  2005  .51 P .0212 Oct  2005  .52 P .0249 Oct  2005  .53 P .0289 Actual Costs with Cotton Market (NYBOT) at $.53 11/3/05 {Level of Protection} {Type of Protection} {End of Protection} {Price of Protection}

24. Sample Cost of Transaction

25. Sample Cost of Transaction for 100 MT

26. Outcome – Sell Physical in Sept, Close Out Options Contracts (Global Market is $.44) PhysicalFinancial (Put Option at $.53) *This is only approximate

27. Three months pass and market falls to $.49 In Sept, Sell Cotton to Buyers at NY Price of $.44 Pass Cotton Through Gin In July Purchased 100 MT for NY Equivalent of $.50 Physical Transaction Purchase a Put Option Contract to $.53 at Cost of $.0329 Close out position by selling contract back* Financial Transaction *Receive approximately the difference between the strike price and the market price for the contract

28. Closing the Contracts • Once you purchase the option you own it and monitoring the value of it is an ongoing activity • You must watch the market and "do something with it" every time you make a physical sale. • You should close the contracts when you no longer need the protection, i.e. when you have sold your physical stock

29. Cont…… • Option contract has to be settled or sold very soon after physical sales contracts have been made. • If timing is not correct, NYBOT price can move back up and payout would not be available • In order to close out the contract you must communicate with CRDB who will contact the broker for finalizing the transaction

30. Important Documentation • Application Form – Purchase Order • Purchase Order Legal Agreement • Purchase Confirmation • Settlement Document

31. Way Forward The goal of CRDB’s Kinga Ya Bei program is to have clients implementing price risk management strategies that help them improve their overall financial condition and protect from losses. • Commit a day within the next four days for KYB team (CRDB & CRMG) to come and discuss with you a suitable plan. • CRDB will provide a market update with premium indications (please sign up with CRDB for this service) • If you are not available in the next four days you can contact CRDB • Review contract documents and legal agreement

32. Thank You