international market risk mngt

OCHIR CONSULTING CO., LTD.

PRESENTS

INTERNATIONAL MARKET

RISK MANAGEMENT

Ulaanbaatar 2007-Fall

CLASS OBJECTIVE

Introduction to market price (FX and

commodity) risks and financial derivatives

Students are expected to learn how to make

calculations on financial derivatives

Practical use of basic financial derivatives

MONGOLIA-BANANA REPUBLIC

Major export items

CU copper

AU gold

Cashmere

others

2 main ways to boost profits

Keep costs down,

Commodities price risk management

MINERS & DEALERS

MINERS

DEALERS

MINERS & DEALERS

MINERS

GEOLOGICAL

SURVEY

MINING

PRODUCTION

DEALERS

SUPPLY &

DEMAND

INTERNATIONAL

POLITICS

INTERNATIONAL

ECONOMICS

e-mail: ochir_co@magicnet.mn 7

GOLD CHART 1992-2002

COPPER CHART 1992-2002 MCU0, Close Monthly

Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul

30Sep 1438.5030Sep 1438.50

COPPER CHART 1997-2002 MCU0, Close Weekly

Sep97 Jan98 May Sep Jan99 May Sep Jan00 May Sep Jan01 May Sep Jan02 May Sep

18Oct 1497.25

COPPER CHART 2000/IX-02/X MCU0, Close Daily

Sep00 Oct Nov Dec Jan01 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan02 Feb Mar Apr May Jun Jul Aug Sep Oct

21Oct 1519.75

COPPER CHART 2001/X-02/X MCU0, Close Daily

Oct01 Nov Dec Jan02 Feb Mar Apr May Jun Jul Aug Sep Oct

21Oct 1519.7521Oct 1519.75

GOLD CHART YI-IX/2002

VI/4-VIII/1 LOST OPPORTUNITY

FOR 1 TONN OF GOLD

1 TONN= 1 000 000 gramm = 32 150,72

06.04.02 330,00$ 32 150,72 10 609 738 , 45

08.01.02 298,00$ 32 150,72 9 580 914 , 56

LOST OPPORTUNITY 1, 028, 823. 89$

IS COMMODITY PRICE RISK A

FORSE MAJOR?

NOT REALLY

IS THERE A WAY OF AVOIDING

COMMODITY PRICE RISK?

Y E S !

AND IT SHOULD BE HANDLED!

NECESSITY OF COMMODITIES

PRICE RISK MANAGEMENT NO COMMODITIES RISK MANAGEMENT

MEANS PURE BET ON ONLY PRICE INCREASES

IF THE PRICE GOES BELOW COST OF PRODUCTION THE MINE GETS CLOSED

THE BANK WHICH LENT TO THE MINER WILL BE EXPOSED TO CREDIT RISK

PRICE RISK MANAGEMENT

REQUIREMENT

RAISES CREDIT

RATING FOR

MINERS

Meridian's Kennedy:

* We did it (hedge) for bank loans, * two-thirds of the industry was hedged!!!

Kinross Gold Corp. CEO Robert Buchan: After the company announced in April it would not renew a hedge on 500,000 ounces of gold he got a call the next day from a bank.

Source: Reuters, 10.01.02, 6:57 PM ET

HELPS TO ISSUE

SHARES ON STOCK

EXCHANGES

HELPS IF THE MINE

WANTS TO ISSUE

INTERNATIONAL

CORPORATE BONDS

IT IS TIME TO RAISE

FINANCES MAJOR INTEREST RATES ARE AT LOWEST

LEVELS RECENTLY

SINCE 1999 MONGOLIA HAS “B” CREDIT

RATING, WHICH IS NOT BAD AT ALL

MONGOLIAN COMPANIES HAVE NOW

POSSIBILITY TO GET CREDIT RATINGS &

ISSUE INTERNATIONAL CORPORATE

REAL INTEREST RATE DIFFERETIALS:

WORLD VS MONGOLIA

INTEREST RATES, 12 MONTHS

LOCAL CURRENCY

INTEREST RATES IN

MONGOLIA

Annual

Inflation

REAL INTEREST

RATE IN

MONGOLIA

min min

2002.9.30 17,0% 3,1% 13,9%FOREIGN CURRENCY

(USD) INTEREST

RATES IN MONGOLIA

LIBOR, 12 months:

INTEREST RATE

DIFFERENTIALS

2002.9.30 12,0% 1,7% 10,3%

STANDARD & POORS

Sovereign Ratings List Ratings are as of September 19, 2002 (updated weekly)

Sovereign

rating

Outlook

Short-

rating

Outlook

Short-

rating

Argentina SD SD SD SD

Bulgaria BB Stable B BB- Stable B

China BBB Stable A-3

Ecuador CCC+ Stable C CCC+ Stable C

India BB+ Negative B BB Negative B

Indonesia B- Stable C CCC+ Stable C

Mongolia B Stable B B Stable B

Morocco BBB Negative A-3 BB Negative B

Pakistan B+ Stable B B- Stable B

Panama BB Stable BB Stable B

Russia BB- Stable B BB- Stable B

Senegal B+ Stable B B+ Stable B

Turkey B- Negative C B- Negative C

Ukraine B Stable B B Stable B

Uruguay B Negative B B Negative B

Venezuela B Negative B

Vietnam BB Stable B BB- Stable B

Local Currency Foreign Currency

ERDENET GOT “Â” RATING S T A N D A R D & P O O R’S

Research: Erdenet Mining Corp. Assigned First

Corporate Credit Rating In Mongolia

Publication date: 14-Mar-2002

Analyst: Peter Stephens, Melbourne, John Bailey, HK

MELBOURNE (Standard & Poor's) March 14, 2002--Standard & Poor's said today that it had assigned it’s single- ‘B’ long-term corporate credit rating to Mongolian mining company, Erdenet Mining Corp.(EMC). This is the first corporate credit rating assigned to a company in Mongolia. The rating and its importance to the Mongolian reflects the company’s 51% ownership by the Government of Mongolia (B/Positive/B) and its importance to the Mongolian economy. The outlook is stable.

CONDITIONS OF ERDENET

CORPORATE BOND ISSUE

MINIMUM AMOUNT = $ 50-100

INITIAL MATURITY- 3 YEARS

INT= LIBOR + COUNTRY + COMPANY

RISK RISK

INT = 2% + 2-3% + 2-3 %

INT = ( per annum ) 6-8%

* * duration of the process of road-show to final realization once the project (Bank Feasibility

Study) done - 3 months

COMMODITIES PRICE RISK

MANAGEMENT TECHNIQUES

SPOT ORDERS

FORWARD CONTRACTS

OPTION CONTRACTS

SWAP CONTRACTS

FORWARD CONTRACTS

Gold is to be sold at a Price, quantity and maturity to be set on the contract date.

Unmined gold can be sold out

Forward prices are set at time of contract

Miner gets an OBLIGATION to sell

The forward sell price will be set and wont change whatever prices will be during the contract maturity or at the end of maturity

F = S+S *dI/100*dT/ 360 F = Forward prices S = Spot prices dT = Contract maturity /in days/ dI = Difference btwn USD and Gold Interest rates /in per cent/

Forward contracts

Class Case: Solution

S=900 USD/TOX

I(us)=LIBOR= 1.7 per annum

I(Au)= 1.0

dI= 1.7-1.0= 0.7

dT= 30

F=900+ 900*(0.7/100)*30/360

F=900.525

S 900,00 USD

LIBOR 2%

I(Au) 1%

d(T) 30

F 900,525 USD

Forward contracts

BENEFITS

COMPLETE

INSURANSE AGST

PRICE DROPS

PROVIDES

CLEARANCE AND

STABILITY IN

FOLLOWING

BUSSINESS PLANS

NO DIRECT COSTS ASSOCIATED

PRODUCER MAY LOSE POTENTIAL PROFIT FROM PRICE INCREASES IN CASE PRICES RISE

OPTION CONTRACTS

BY BUYING PUT OPTION

MINER GETS THE RIGHT TO

SELL THE COMMODITY AT

PRICE, QUANTITY, AND

MATURITY PRESET AT THE

CONTRACT DATE.

OPTION CONTRACTS

PROFIT/LOSS ON PUT OPTION (STRIKE @ $318)

295 300 305 310 315 320 325 330 335

OPTION CONTRACTS

BENEFITS

COMPLETE

INSURANSE AGST

PRICE DROPS

PRODUCER GETS

FULL BENEFITS

FROM PRICE

INCREASES IN CASE

PRICES RISE

OPTION PREMIUM

OPTION CONTRACTS OPTION-FREEDOM OF CHOISE

OPTION - FREEDOM OF CHOISE

OPTION – INSURANCE AGST

COMMODITIES PRICE DROP

OPTION CONTRACTS

1994 - AIGI OFFERED PUT

OPTION TO ERDENET AT A

STRIKE OF $2,800 WHEN SPOT

COPPER PRICES WERE

AROUND $3,000

COPPER CHART 1992-2002 MCU0, Close Monthly

Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul

30Sep 1438.5030Sep 1438.50

POTENTIAL ANNUAL PROFIT OF ERDENET

IF IT BOT PUT OPTION @ STRIKE $2,800

ANNUAL ERDENET COPPER SALES

in0.9999 of metal 120,000.00

1995.01 2,800.00$ 120,000.00 336,000,000.00$

10.01.02 1,440.00$ 120,000.00 172,800,000.00$

ANNUAL LOST OPPORTUNITY- 2002 $163,200,000.00

SWAP CONTRACTS

We have a swap transaction if the

commodity is sold on spot and

bought back at forward date

or bought on spot and sold out on a

forward date.

SWAP TRANSACTIONS

BENEFITS

ALLOWS TO FULFILL

FINANCIAL OBLIGATIONS

IN CASE OF

UNPLEASANT PRICE

CONDITIONS

ALLOWS TO RAISE

FUNDS AT A MINIMUM

COST WHEN REQUIRED

WEAK POINTS

NO DIRECT COST

WON’T INSURE

FROM A PRICE

CONFRONTATION ?

“I KNOW MY JOB!” “NO LOAN!”

CO-OPERATION ?

CONCLUSION No 1

NOT REALLY IS THERE A WAY OF AVOIDING

COMMODITY PRICE RISK? Y E S ! AND IT SHOULD BE HANDLED!

IS COMMODITY PRICE RISK A

FORSE MAJOR?

CONCLUSION No 2

NO COMMODITIES RISK MANAGEMENT MEANS PURE BET ON ONLY PRICE INCREASES

IF THE PRICE GOES BELOW COST OF PRODUCTION THE MINE GETS CLOSED

THE BANK WHICH LEND TO THE MINER WILL BE EXPOSED TO CREDIT RISK

WHAT IS INT’L PRACTICE?

Meridian's Kennedy:

* We did it (hedge) for bank loans, * two-thirds of the industry was hedged!!!

Kinross Gold Corp. CEO Robert Buchan: After the company announced in April it would not renew a hedge on 500,000 ounces of gold he got a call the next day from a bank.

Source: Reuters, 10.01.02, 6:57 PM ET

CONCLUSION No 3

IT IS IN THE BANKS’ INTEREST

TO EXERSIZE OR DEMAND

COMMODITIES RISK MANAGEMENT

WHOM TO ADDRESS ?

BULLION BANKS

YOUR ADVISOR OCHIR CONSULTING CO., LTD. INTRODUCING COMMODITIES RISK

MANAGEMENT TECHNIQUES IN MONGOLIA IN CO-OPERATION WI BANK OF MONGOLIA AND GOLD MINERS, CONNECTING THEM TO INTERNATIONAL MARKETS,

BULLION AND METALS MARGIN TRADING WI THE 24-HOUR MONITORING AND DEALING DESK

SEMINARS AND TRAINING FOR THE MINERS IN ASSOCIATION WI MINERS’ ASSOCIATION OF MONGOLIA, BANK OF MONGOLIA, MINERALS DEVELOPMENT CENTER, BANKERS ASSOCIATION OF MONGOLIA.

ASSISTING IN CORPORATE BOND ISSUE,

ASSISTING IN GOLD REFINING AGREEMENTS

YOUR ADVISOR OCHIR CONSULTING CO., LTD. MORE THAN 15 YEARS IN THE BULLION AND FOREX

4 YEARS AS DIRECTORS OF BANK OF MONGOLIA:

FX & BULLION RESERVE MANAGEMENT

INTERNAL CONTROL & ADMINISTRATION DEPTS

CABINET MEMBER PORTFOLIO HOLDING:

MINISTER OF FINANCE (1999-2000)

MINISTER OF JUSTICE (1999-2000)

DEPUTY MINISTER OF JUSTICE (1990-1992)

WORLD BANK & ADB FSAC PROGAMME- COMMODITIES RISK MANAGEMENT INITIATIVE FOR COPPER, GOLD & CASHMERE WAS MADE AS A REQUIREMENT FOR THE CONSEQUTIVE TRANCH DISBURSEMENTS WAS PUT AT OUR PROPOSAL

e-mail: ochir.consult@gmx.com 52

YOUR ADVISOR

Peace Avenue-44/753

Ulaanbaatar 14250 MN

Tel: +976 9918 5150

Email: ochir.consult@gmx.com

Project Principals Yansanjav OCHIRSUKH

Professional Occupations:

1993-99 Bank of Mongolia (Central Bank), gold trader, Director for Gold & FX Reserves, Member of Board

• Raised Net International reserves for the Bank fm

USD 4.0 mln in 1992 to USD 180 mln in 2000

• Twice negotiated and improved gold refining agreements for the Central bank

• Sold on net about 60 tons of gold

• Personal dealing record: around USD 20.0 mln

1996-97 Consultant on emerging economies, Operations Evaluations Department,

The World Bank, Washington DC

1999-2000 Finance Minister of Mongolia for three consecutive Governments

• Initiated and finalized Sovereign rating process for Mongolia fm S&P

• Initiated set up for commodities (copper, gold and cashmere) price risk management program for Government under the World Bank & ADB- financed FSAC Program

• Introduced Mongolia as Member of European Bank for Reconstruction & Development as well as European Investment Bank

• Closed 2 biggest troubled commercial banks

• Granted License 3 new commercial banks

• Governor of IMF, World Bank, ADB, EBRD & EIB for Mongolia

2000-Present OCHIR Consulting Ltd., President & CEO

SPECIAL GRATITUDE

BRIGHT STUDENTS OF

GLOBAL

LEADERSHIP

UNIVERSITY

THANK YOU FOR YOUR KIND ATTENTION!

Next class:

Visit to Bank of Mongolia Museum

Date &

30-Oct-08

15:59 pm

Bank of

Mongolia

(The Central Bank)

international market risk mngt

b credit rating

credit risk

stable cindia bb

commodities risk management

copper chart

price increases

bb negative bpakistanb

gold chart yiix2002e

Economy & Finance

department of professional...

supply chain mngt

dissecting the global financial crisis: a case in risk mngt

manure waste mngt

ethics and mngt

revenue mngt

perspective mngt

mob mngt 3gpp

project mngt 1

intro pro mngt

port mngt triskandreturn4

coke strat mngt

material mngt

mngt.201 assgt

online hotel mngt

project mngt plan

anesthetic mngt -high risk obg pts

intro to mngt

strategic mngt

portfolio mngt newww