Financial Risk Management: An Earnings-at-Risk Approach

Daniel Montante E.I. du Pont de Nemours & Company December 6, 2000

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

Notional Amount at Risk = $5 billion

Floating Rate Debt 32%

Energy Feedstock #1 9% Energy Feedstock #2 4% Energy Feedstock #3 5% Agriculture #1 2% Agriculture #2 2%

Anticipated Local Currency Margins 46%

For illustrative purposes only

DuPont's Earnings-at-Risk (EaR) Approach

Our 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

DuPont's Earnings-at-Risk (EaR) Approach

Our 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

% Probability

10%

-2.769447747 -2.582828822 -2.396209898 -2.209590973 -2.022972049 -1.836353124 -1.6497342 -1.463115275 -1.276496351 -1.089877426 -0.903258502 -0.716639578 -0.530020653 -0.343401729 -0.156782804 0.02983612 0.216455045 0.403073969 0.589692894 0.776311818 0.962930743 1.149549667 1.336168592 1.522787516 1.709406441 1.896025365 2.08264429 2.269263214 2.455882139 2.642501063 2.829119987 More

0% Equals the Earnings at the 95% CI

3%

5%

8%

$25 MM = EAR

Distribution of Annualized Earnings Outcomes

$75 MM 25.0%
Cumulative %

$100 MM Budgeted Earnings 50.0%

.0%

75.0%

100.0%

What Does EaR Mean?

Distribution of Annualized Earnings Outcomes

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

Percent Probability
25%

20%

15%

10%

5%

0%

$250
Equals the earnings corresponding to the 95% CI

$300
Equals the expected or budgeted ATOI

Earnings ($ millions)

EAR Summary by Month

300.00 250.00 200.00 150.00 100.00 50.00 0.00

ay

Au gu st

ar ch

br ua ry

Ap ril

Ju ly

Se

Expected Earnings

Earnings at Risk

For illustrative purposes only

ov em be r D ec em be r

pt em be r

nu ar y

Ja

Fe

ct ob er

Ju ne

Earnings at Risk Contribution by SBU Time Horizon = 1 year

SBU #5 7%

SBU #6 7%

SBU #7 6%

SBU #1 30%

SBU #4 10%

SBU #3 20%

SBU #2 20%

SBU EaR Hedge Effectiveness Comparison Time Horizon = 1-year

$150 $100 $50 $0 ($50) ($100)

SB

SB

SB

SB

SB

SB

SB

For illustrative purposes only

EaR - Natural EaR - With Hedging

iv er sif ic a

tio n

Be

ne fit

#1

#2

#3

#4

#5

#6

#7

Earnings at Risk - whats really at risk = $750 million

Anticipated Local Currency Margins 28% Floating Rate Debt 3% Energy Feedstock #1 37%

Agriculture #2 2% Agriculture #1 2% Energy Feedstock #3 13% Energy Feedstock #2 15%

For illustrative purposes only

Corporate-Wide & SBU Specific Benefits of EaR Methodology

Benefits to DuPont
Clarity of Risk Exposures: Improved clarity of exposures to enhance decision making Management of EPS Volatility: Better manage earnings volatility to optimize shareholder value

Benefits to SBUs
Improved Risk Management within the SBUs: Risk management expertise can be more readily applied to risk issues with the businesss 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

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.

Goals of Risk Management

Distribution after Risk Management Inherent Distribution

Earnings

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