Financial Risk Management: An Earnings-at-Risk Approach

1. Financial Risk Management:An Earnings-at-Risk Approach Daniel Montante E.I. du Pont de Nemours & Company December 6, 2000 h

2. Some Company Background • Centralized Treasury • FX Exposure in 40+ Currencies • $2 Billion Hedgeable Commodity Exposure • $10+ Billion Debt Portfolio • Notable Portfolio Changes • Conoco Divestiture • energy subsidiary • Pioneer Hi-Bred International Acquisition • agricultural subsidiary h

3. Notional Amount at Risk = $5 billion For illustrative purposes only h

4. DuPont's Earnings-at-Risk (EaR) ApproachOur more quantitative approach to corporate global risk management . . . Earnings-at-Risk (EaR) • Calculates the maximum loss on business and/or financial positions on a probability basis based on degrees of confidence • Basically: Revalue expected earnings with maximum potential earnings shortfall due to adverse market movements • Monte Carlo simulation h

5. DuPont's Earnings-at-Risk (EaR) ApproachOur more quantitative approach to corporate global risk management . . . Earnings-at-Risk (EaR) • Identification: Data Collection of Cash Flows with an Associated Market Risk Factor • Aggregation & Quantification • Measurisk - EaR Analysis • Correlations & Volatilities • Portfolio approach - cross SBU • Management of Risk • Risk limits • Derivative contracts • Business strategy or tactics h

6. Distribution of Annualized Earnings Outcomes

7. What Does EaR Mean? Distribution of Annualized Earnings Outcomes Percent Probability 25% 20% 15% 10% 5% 0% • A monthly EaR of $50 MM means: On Average, one month in 20 you would expect a variance of $50 MM from (forecast) budget levels due to market movements • Only 5% of the time would you anticipate exceeding your EaR $250 Equals the earnings corresponding to the 95% CI $300 Equals the expected or budgeted ATOI Earnings ($ millions) h

8. h For illustrative purposes only

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10. For illustrative purposes only h

11. Earnings at Risk - what’s really at risk = $750 million h For illustrative purposes only

12. Clarity of Risk Exposures: Improved clarity of exposures to enhance decision making Management of EPS Volatility: Better manage earnings volatility to optimize shareholder value Senior Management Improvement: Improved communication b/w senior management and the SBUs Performance Evaluation of Divisions: Internal and external evaluation on a return on risk basis. Improved Risk Management within the SBUs: Risk management expertise can be more readily applied to risk issues with the business’s Clear Accountability: Consistency b/w decision making responsibility and results can be established, e.g., business performance vs. hedge results Performance Evaluation: Performance can be viewed on a risk return basis Improved Communication: Clear communication b/w SBUs, and treasury or commodity risk management, ensuring exposures are understood, and appropriate hedging strategies are put in place Corporate-Wide & SBU Specific Benefits of EaR Methodology Benefits to DuPont Benefits to SBUs h

13. Goals of Risk Management Distribution after Risk Management Inherent Distribution Earnings h

14. EaR Partnership • Partnership with Measurisk.com • Advisory Role • Data & Modeling Capability • FAS 133 • WEB Application • Input positions and perform risk analysis online • Stress condition modeling h