equity risk management hedging and monetization strategies · equity risk management hedging and...

Equity Risk ManagementHedging and Monetization Strategies

UBS is the main partner of Alinghi, America’s Cup winner 2003.

I. Introduction Concentrated Assets — Maximize the Power, Minimize the Risk . . . . . . . . . . . . .1The Advantages of Equity Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . .2Serving Diverse Investor Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Case History: A Study in Personalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

II. Equity Risk Management StrategiesOverview Chart of Equity Risk Management Strategies . . . . . . . . . . . . . . . . . . . .5Summary of Equity Risk Management Strategies . . . . . . . . . . . . . . . . . . . . . . . . .6

III. Strategy DetailsRemain Unhedged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Sale of OTC Covered Call Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Purchase of OTC Put Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Zero-Premium Collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Maximum Monetization and Asset Protection (MMAP) . . . . . . . . . . . . . . . . . . .13

IV. Frequently Asked Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

V. Tax ConsiderationsApplicable Tax Legislation and Straddle Rules . . . . . . . . . . . . . . . . . . . . . . . . . .18Tax Consequence Scenario Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

VI. Legal and Regulatory IssuesRules 144 and 144(k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Rule 145 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Considerations for Insiders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Rule 10b5-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24Additional Issues and Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

VII. The Businesses of UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Contents

UBS is a world-leading financial powerhouse with the heart and soul of a two-person organization. OurEquity Risk Management Team will work hand-in-hand,employing their financial acumen and analyticalinsight to tailor the best strategy for you.

Concentrated Assets — Maximize the Power, Minimize the Risk

High-profile initial public offerings andstock-for-stock acquisitions have leftmany individuals with an enviable, yet precarious, position of owning large concentrations of a single stock.Unfortunately, the inability to sell —whether due to insider status, capitalgains implications or legal restrictions— can make managing the risks associ-ated with these holdings complicated.

In a time when our U.S. equity marketsare characterized by unprecedentedgrowth and volatility, how do youprotect the value of your large positionsand enhance investment flexibility?That’s where UBS can help.

You and us —A Powerful PartnershipYour circumstances and goals are unlikeanybody else’s. At UBS, we take time tofind out about your needs and createan equity risk management strategy thatmakes sense for you. We remain focusedon you and how we can best optimizeyour concentrated equity positions. We utilize strategies which can:• Protect against declines in stock value • Enhance returns by “monetizing”

a stock position• Allow for diversification • Increase borrowing capacity• Defer costly capital gains taxes

Why UBS?

• Consistently recognized as a leader in Equity RiskManagement

• Strength of credit rating (S&P: AA+, Fitch: AA+,Moody’s: Aa2)

— Peace of mind for our investors

• Globally integrated presence in all major financial markets

— Some 70,000 employees around theworld, 40% in the U.S.

• High caliber and experience of sales team professionals

• Awarded “Best Global Risk Management House” by Euromoney, 2005

Introduction 1

I. Introduction

The Advantages of Equity Risk Management

Well-diversified portfolio of stocks

Individual stocks

Liquidity Strategies Provide DiversificationDiversification is the key to enhancedinvestment flexibility. UBS offers solu-tions that provide access to cash — tobuy stock in other companies or simplyenjoy life’s rewards. There is no need tosell shares and incur capital gains taxesor surrender the privileges of holdingthe stock.

Hedging Strategies Limit RiskTo limit downside risk, UBS also offers a variety of hedging tools with expertisein execution. We provide a customizedstrategy designed to meet your uniqueneeds and objectives.

The Power of Diversification

The true power of diversification lies inits ability to target an expected returnwhile reducing the exposure to risk.This chart depicts 10 individual stocksand their expected returns and associ-ated volatility. The blue line representsa diversified portfolio holding variouscombinations of these 10 assets. Aninvestor holding any one of these individual stocks (we’ve used A in ourexample) would clearly be better offdiversifying to create a portfolio thatoffers the same potential rewards withless risk (point B).

In addition, UBS can create a programthat limits potential losses while simultaneously enhancing liquidity.

All of our risk management strategiesare structured as over-the-counter(OTC) transactions and are not listed on any options exchange. The OTCoption market has the following advan-tages over listed option markets:• Flexibility: The OTC market provides

the ultimate flexibility with regard todetermining price and maturity.

• Liquidity: The OTC market is as liq-uid as the liquidity of the underlyingstock.

• European Style: Exercisable at maturity, there is no risk of early exercise in the OTC market.

Equity Risk Managementdelivers two significantbenefits. It allows you toutilize strategies that pro-tect your holdings and, atthe same time, enhancesinvestment flexibility.

2 Introduction

Risk (volatility)

Expe

cted

Retu

rn

B A

0%0% 10% 20% 30% 40%

2%

4%

6%

8%

10%

12%

14%

Equity Risk Management solutions can accommodatea variety of high net worthinvestors.

Serving Diverse Investor Needs

• Initial investors: Initial investors who own restricted or low-basisshares of an issuer who recently had an initial public offering or amerger transaction.

• Current or retired executives or employees: A current or former company executive or employee whohas accumulated a large amount of shares.

• Inheritance: A family who hasowned shares of a company for manyyears, perhaps even generations.

Equity Risk Management solutions canaccommodate a variety of high networth investors holding large, concen-trated positions. These include:

• Executives who were bought outfor stock: A company executive,founder or investor of an acquiredcompany who received shares of theacquirer as consideration in a mergertransaction.

• Individuals with leveraged positions: An individual with an unprotected concentrated equityposition who carries margin debt can restructure and eliminate the possibility of margin calls.

Introduction 3

You and us. It’s our primary focus atUBS. Our Equity Risk Managementsolutions are no exception. Here’s a case in point…

A long time investor in United ParcelService, Inc. (UPS), John had large hold-ings in the stock, as well as a signifi-cant position in FedEx Corp. (FDX). Atthe time he met with UBS, his holdingswere valued at $350 million, with mar-gin debt of nearly $100 million. Johnwas bullish on the long-term prospectsof both companies, but was smartenough to realize that a short-termdecline might result in a forced liquida-tion of his stock at depressed prices.

During his initial conversation with UBS,John was shown how the firm could:

• Reduce his existing margin expenseby moving the loan to UBS, and

• Reduce the risk of any margin call byhedging some or all of his position witha Maximum Monetization and AssetProtection (“MMAP”) transaction.

This initial discussion was followed by a review, during which UBS evaluatedmultiple scenarios to determine whichstrategy most effectively:• Minimized shares allocated to hedge

(to retain upside) • Eliminated margin call risk • Significantly reduced financing cost

John’s original intention, to hedge halfhis FDX and half his UPS, proved to bethe most expensive and least effectivestrategy. The optimal result was to

hedge his entire UPS position, whichgenerated the maximum liquidity. UBSexpedited John's strategy, completinghis documentation within days of hispending business trip, and acted upontrading instructions to meet John'sobjectives. Despite a volatile market,UBS exceeded John’s expectations onthe execution of the deal.

UBS was able to add value by:• Delivering expert and objective ideas• Focusing on what’s right for

the client• Providing personal service with great

attention to detail• Timely execution

4 Introduction

Case History:

A Study in Personalization

Overview Chart of Equity Risk Management Strategies

Equity Risk Management Strategies 5

II. Equity Risk Management Strategies

Concentrated Equity Position

Ben

efits

Co

nsi

der

atio

ns

Sale of Position

Sale of Covered Calls

Purchase of Puts

Collars MMAPs

Substantial liquiditygenerated up-front

No tax event until maturity

Provides floor for stock price

Can be structuredwith zero up-frontcost



No ceiling onupside exposure



Generates cash flow


Generates cash flow

Removes downside risk

Recognizes capital gain

Eliminates upsideexposure

Discounted ifshares restricted

Ceiling on upside exposure

Does not fully hedge downside risk

Potentially significant up-front cost


Upside influencedby option pricing,not the client


Self-financing:No separate loanvehicle required

Protected stock position facilitates collateralized lending arrangement

Fin

anci

ng

Summary of Equity Risk Strategies

Investor ProfileThis strategy may be right for a highnet worth individual who is extremelybullish on the underlying stock, andwho is willing to accept the risk of a dramatic stock price decline.

Investor ProfileThis strategy may be right for a highnet worth individual who is bearish andwho believes the stock price will likelyfall over the medium to long-term.

ActionFor the investor holding freely tradable,unrestricted shares, simply sell theshares, pay taxes and reinvest the net proceeds.

For the investor holding illiquid securi-ties, including restricted stock subjectto Rule 144, call options or warrants,there may be possible sale opportuni-ties — UBS may be able to privatelypurchase restricted securities from non-affiliates at a discount to the currentmarket price, thereby creating immedi-ate liquidity.

Benefits• Cash flow is generated• Downside risk is removed

Considerations• Creation of a recognized capital gain• Upside exposure is eliminated• Sale price may be discounted

if shares restricted

Investor ProfileThis strategy may be right for a highnet worth individual who is mildly bullish on the underlying asset positionand wishes to enhance its “yield.”

ActionImplement a strategy of selling OTCcovered call options.

Benefits• Cash flow is generated• No tax event until maturity

Considerations• Ceiling on upside exposure• Downside risk is not fully hedged

Remain Unhedged Sale of Position Sale of OTC Covered Call Options1

In light of the recentequity market perform-ance, many investors recognize the prudence of protecting at least a portion of their concen-trated stock position bypursuing an equity riskmanagement strategy.

6 Equity Risk Management Strategies

Note:1 See Section V, Tax Considerations.

Investor ProfileThis may be right for a high net worthindividual who is optimistic about theprospects of the stock, but who wishesto protect the value of a concentratedequity position and maximize moneti-zation proceeds and diversification possibilities.

ActionImplement a strategy of MaximumMonetization and Asset Protection —generically known as a variable pre-paidforward sale.

Benefits• Substantial liquidity generated

up-front• No tax event until maturity

(assuming no early unwind)• Provides floor for stock price

Considerations• Ceiling on upside exposure• Self-financing: no separate loan

vehicle required


2 See Section V, Tax Considerations, which contemplates documenting the collar as a single-pay contract.

Investor ProfileThis may be right for a high net worthindividual who is bullish on the under-lying stock and who does not want tobe exposed to unforeseen downwardprice movements.

ActionImplement a strategy of purchasingOTC put options.

Benefits• Upside exposure has no ceiling• No tax event until maturity• Provides floor for stock price

Considerations• Potentially significant up-front costs• Protected stock position facilitates

collateralized lending arrangement

Investor ProfileThis may be right for a high net worthindividual who is moderately bullish onthe underlying stock, and who wishesto protect the value of the positionwithout paying option premium.

ActionImplement a strategy of zero-premiumcollars.

Benefits• Can be structured with zero

up-front cost• No tax event until maturity

(assuming no early unwind)• Provides floor for stock price

Considerations• Ceiling on upside exposure• Upside determined by option pricing,

not the client• Protected stock position facilitates

collateralized lending agreement

Purchase of OTC Put Options1 Zero-Premium Collars2 Maximum Monetization andAsset Protection (MMAP)1

Equity Risk Management Strategies 7

700

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1600S&P 500 Index

2006200520042003200220012000199919981000

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NASDAQ Composite Index

S&P 500Index

NASDAQ Composite Index

The investor who is extremely bullishon the underlying stock and is willingto accept the risk of a dramatic stockprice decline should simply do nothingon 100% of their position.

Freely Tradable• The investor who owns freely trad-

able unrestricted shares and believesthe stock price will likely fall over themedium to long-term should simplysell the shares, pay taxes and reinvestthe net proceeds.

8 Strategy Details

Remain Unhedged

In light of the recent equitymarket performance, manyinvestors recognize the prudence of protecting at least a portion of theirconcentrated stock position.Therefore, many investors pursue one of the strategiesdiscussed in this section for at least a percentage of their holdings.

Sale of Securities

Illiquid Securities• Many investors hold illiquid securities

including restricted stock subject toRule 144, call options or warrantsand are unaware of possible saleopportunities. In certain situations,UBS may be able to facilitate the sale of restricted securities in theopen market.

• UBS may be able to privately pur-chase restricted securities from non-affiliates at a discount to the current market price, thereby creatingimmediate liquidity for the investor.

• The amount of the discount is deter-mined primarily by liquidity of theunderlying security, borrow costs,market interest rates and the remain-ing length of the restricted period.Trade date will be the effective saledate, triggering a taxable event forthe investor.

III. Strategy Details

Equity Market Performance

Source: Bloomberg, May, 2006

Exposed

If stock falls,investor exposed to downside risk

Initial Price = $100

Call Strike = $110

Capped

If stock finishesabove call strike,investor pays UBS(final price less $110) at maturity

Investor retains first$10 of appreciation

The sale of covered call options is bestsuited for the investor who is mildlybullish and wishes to enhance the“yield” on the underlying asset posi-tion. While the sale of covered callsgenerates up-front premium income, it should not be considered a hedge of downside risk.

The owner of a European-style calloption has the right to buy the stockon a certain date for a pre-determinedprice (the call strike). The seller of a call option will forego any appreciationabove the call strike. When an investor

Strategy Details 9

Sale of OTC Covered Call Options1

sells calls on shares he/she alreadyowns outright, the calls are “covered.”

For example, the sale of a six-monthcall option which limits the seller to thefirst 10% of appreciation might gener-ate a premium of 3%–6%, payable up-front in cash (assuming a zero dividend,moderately volatile stock).

The sale of an out-of-the-money cov-ered call option will not immediatelytrigger a taxable event. Unlike listed call options, European-style call options may be settled either in cash or physical

form, at maturity. Exercise occurs if thefinal market price is higher than the call strike. With cash settlement, theinvestor pays to UBS the differencebetween the call strike and the finalmarket price. For physical settlement,the investor delivers the stock to UBSand receives cash equal to the callstrike. Physical settlement is an actualsale of the underlying shares while cash settlement is not.

The graph below assumes an initialprice of $100 and the investor receiveda call premium.

At maturity, if thefinal price is $110or lower, the callexpires withoutvalue and there areno payments.


The investor who is bullish on theunderlying stock but does not wish tobe exposed to unforeseen downwardprice movements should consider thepurchase of put options. Purchasing a put option will effectively guarantee a minimum value for the asset. Theowner of a European-style put optionhas the right to sell the stock on a certain date for a pre-determined price (the put strike).

10 Strategy Details

strike. With cash settlement, theinvestor receives from UBS the differ-ence between the put strike and thefinal market price. For physical settle-ment, the investor delivers the stock toUBS and receives cash equal to the putstrike. Physical settlement is considereda sale of the underlying shares at theput strike while cash settlement is not.

The graph below assumes an initialprice of $100 and the investor paida put premium.

Purchase of OTC Put Options1

For example, a two-year put optionthat provides 90% protection may cost15% to 25% or more, payable up-front in cash (assuming a zero dividend,moderately volatile stock).

The purchase of an out-of-the-money put option will not trigger a taxableevent. Unlike listed put options, Euro-pean-style put options may be settledeither in cash or physical form, if exer-cised at maturity. Exercise occurs if thefinal market price is below the put

Monetization for Put OptionsThe combination of long stock and aput option creates a creditworthy asset.During the life of the put option, UBSwill generally lend up to a maximum of

90% of the protected value (the putstrike) for non-purpose credit on unre-stricted shares. If the loan is to be usedfor purpose credit (the purchase ofmargin securities) the maximum loan

amount is restricted to 50% of themarket value of the underlying stock atthe time of borrowing.

At maturity, if thefinal price is $90 or higher, the putexpires withoutvalue and there areno payments.

Protected

If stock finishesbelow put strike,UBS pays investor($90 less final price) at maturity

Put Strike = $90


Investor exposed to first $10 of depreciation

Full Upside

If stock is up,investor retains100% of appreciation


The investor who is moderately bullishbut wishes to protect the value of aparticular equity position without pay-ing option premium should consider anequity collar. Many investors like theprotection afforded by the purchase ofa put option but do not wish to paythe up-front premium required. If will-ing to forego appreciation above a cer-tain level, the investor can sell a calloption to generate premium income.When the cost of purchasing a putoption is fully funded by selling a call

option, the transaction is referred to as a “zero-premium collar.”

During the life of the collar, theinvestor retains ownership, votingrights and dividends (however, oftencapped at the current level on tradedate) on the underlying shares.

For example, an investor owns stockwith a market price of $100 and wantsto limit his downside risk to 10%.

Strategy Details 11

Zero-Premium Collars1

Continued on following page.Note:1 See Section V, Tax Considerations, which contemplates documenting the collar as a single-pay contract.

The investor purchases a two-yearEuropean-style put option with a strikeprice of $90 and simultaneously sells a two-year European-style call optionwith a call strike of $120 (the calcu-lated level necessary to generate callpremium income which fully offsets theput premium cost). For $0.00 out-of-pocket cost, the investor’s exposure isprotected at $90 and below, capped at $120 and above, and fully exposedin between.

At maturity, if thefinal price is at orbetween $90 and$120, both the calland put optionsexpire withoutvalue and there areno payments.


Protected

If stock finishes belowput strike, UBS paysinvestor ($90 less finalprice) at maturity

Call Strike = $120

Investor retains first$20 of appreciation…

Capped

If stock finishes abovecall strike, investor paysUBS (final price less$120) at maturity

Put Strike = $90

and is exposed to first$10 of depreciation.

Zero-Premium Collars

12 Strategy Details

Many tax advisors have the opinionthat entering into a zero-premium collar which has at least a 15% to20% spread between the call strikeand put strike will not create a taxableevent. As with separate put and calloptions, the zero-premium collar maybe cash or physically settled.

Monetization of Zero-Premium CollarsSince the collar protects the underlyingstock, it becomes a very credit-worthyasset, thus, combining a loan with a

collar will provide monetization and anopportunity for diversification.

During the term of the zero-premiumcollar, UBS will generally lend up to amaximum of 90% of the protectedvalue (the put strike) for non-purposecredit (i.e., for the purchase of invest-ments other than margin securities). If the loan is to be used for purposecredit (i.e., the purchase of marginsecurities) the maximum loan amountwill be limited to 50% of the marketvalue of the underlying stock at the

Continued from previous page.

time of borrowing. Investors seekingmore than 50% should consider theMMAP transaction described on thefollowing page.

Based on the prior example, the $90put strike would allow for a maximumloan amount of $81 for non-purposecredit (assuming unrestricted shares arehedged) and $50 for purpose credit.

There is no risk of a margin call when a non-purpose loan is secured by azero-premium collar.

Put Strike = $90


Protected

Call Strike = $120

Investor retains first $20 of appreciation...

Capped

Non-Purpose Loan Proceeds = $81

and is exposed to first$10 of depreciation.

Purpose Loan Proceeds = $50

The MMAP transaction, genericallyknown as a variable pre-paid forwardsale, is the most common method ofhedging and monetizing used today.The MMAP is best suited for the in-vestor who is optimistic about theprospects for their stock, but wishes to protect the value of a concentratedequity position and maximize theirmonetization proceeds and diversifi-cation possibilities.

Rationale of the MMAPEnables investors to: • Hedge the position• Maintain upside exposure

(as defined by the client) • Extract up to 90% of the stock value

in cash without selling the underly-ing shares. The cash advanced to theclient is tax deferred and can be usedfor any purpose. Typical objectivesinclude diversification or eliminationof margin debt.

Cash Flows of the MMAPThe cash flows of the MMAP are as follows:

• Trade Date: Client receives discountto the current stock price by agreeingto deliver a variable amount of theunderlying stock (or equivalent cashamount) at the maturity date.

• Over the Life of the MMAP: Clientmay either receive dividends or pass

Strategy Details 13

Maximum Monetization and Asset Protection (MMAP)1


Components of the MMAP DiscountThe up-front discount of the MMAP ismade up of three components:

1. Cost of Funds: present-value discount of the Lower Strike over the term

them through to UBS. Most clientselect to cap the dividends at the levelpaid at the time of execution.

• Maturity: Client delivers variableamount of underlying shares (orequivalent cash amount) per the settlement scenarios illustrated in the following page.

Chart Illustrates MMAP on a Stockwith No Dividend

2. Cost of Hedge: credit or debitattributed to an equivalent collarpriced with Lower and Upper Strikesof the MMAP

3. Dividend Yield: present-value ofany dividend cash flows are debited

Upper Strike = $140

Lower Strike = $100

Advance = $85

Trade Date

Three Years

Maturity

Investor retains up to $40 of appreciation

Present value of Lower Strike embedded collar value = Advance Amount

Continued on following page.

14 Strategy Details

180.00 77,778 14,000,000 22,222 4,000,000176.00 77,273 13,600,000 22,727 4,000,000172.00 76,744 13,200,000 23,256 4,000,000168.00 76,190 12,800,000 23,810 4,000,000164.00 75,610 12,400,000 24,390 4,000,000160.00 75,000 12,000,000 25,000 4,000,000156.00 74,359 11,600,000 25,641 4,000,000152.00 73,684 11,200,000 26,316 4,000,000148.00 72,973 10,800,000 27,027 4,000,000144.00 72,222 10,400,000 27,778 4,000,000

140.00 71,429 10,000,000 28,571 4,000,000135.00 73,529 10,000,000 26,471 3,600,000132.00 75,758 10,000,000 24,242 3,200,000128.00 78,125 10,000,000 21,875 2,800,000124.00 80,645 10,000,000 19,355 2,400,000120.00 83,333 10,000,000 16,667 2,000,000116.00 86,207 10,000,000 13,793 1,600,000112.00 89,286 10,000,000 10,714 1,200,000108.00 92,593 10,000,000 7,407 800,000104.00 96,154 10,000,000 3,846 400,000100.00 100,000 10,000,000 0 –

96.00 100,000 9,600,000 0 –92.00 100,000 9,200,000 0 –88.00 100,000 8,800,000 0 –84.00 100,000 8,400,000 0 –80.00 100,000 8,000,000 0 –76.00 100,000 7,600,000 0 –72.00 100,000 7,200,000 0 –68.00 100,000 6,800,000 0 –64.00 100,000 6,400,000 0 –60.00 100,000 6,000,000 0 –

Maximum Monetization and Asset Protection (MMAP)Continued from previous page.

Upper Limit

Lower Limit

A

Stock price atmaturity

($)

B

Number of sharesinvestor delivers

C

Value of sharesdelivered/cash

settlement amount($)

D

Number of shares investor retains

E

Value ofretained shares

($)

The example shown here illustratesthe settlement for an investor whohas hedged 100,000 shares of a$100 stock and received $85 up-front in a MMAP transaction. Theinvestor chose a Lower Strike of$100 and an Upper Strike of $140to retain up to $40 per share invalue at maturity.

• If the investor chooses cash settlement, the investor will pay the amount in Column C

• If the investor chooses physicalsettlement, the investor willdeliver the number of shares inColumn B, while retaining thenumber of shares in Column D

Unlike the collar, the MMAP transactionrequires no separate loan facility to gen-erate liquidity. Monetization for theMMAP comes via the up-front advance.

In the example on the previous page,the investor receives an advance

Strategy Details 15

amount of $85. Thus, in this example,the MMAP provides 70% more liquiditythan the collar for investment in pub-licly traded equities ($85 for the MMAPvs. $50 for the collar).

Monetization for the MMAP

Comparative Analysis:MMAP vs. Collar with Loan

Collar with LoanMMAP

Asset Protection

Available Proceeds

Maintain Current Dividend (capped)

Collateral Required

Tax Deferral

Retain Appreciation

Maintain Ownership

Ongoing Interest Payments

Margin Calls

Separate Loan-Paperwork

Yes

Up to 90% — dependent on upside retained

Yes

Yes

Yes

Yes — determined by client (capped)

Yes

No

No

No

Yes

50% of market value (purpose credit)

90% of put strike value for unrestricted shares (non-purpose credit)

Yes

Yes

Yes

Yes — determined by option pricing(capped)

Yes

Yes

No

Yes

Concentrated Equity Position


16 Strategy Details

The MMAP vs. Sale after-tax analysis isbased on a hypothetical assumption ofa three-year 100/140% MMAP whichraises 85% up-front on a stock with a $0.00 tax basis. This transaction iscompared against a sale of the samestock. The after-tax analysis is summa-rized as follows:

• Breakeven: This is the annual stockgrowth required for the MMAP trans-action to be the same as a sale onan after-tax basis. For this example,the stock would have to grow byapproximately 4.2% for the MMAPand sale after-tax performance to be identical.


• MMAP Outperformance: The darkgreen shaded area represents theafter-tax MMAP outperformance over a sale if the annual stock growthexceeds 4.2%. The maximum absoluteoutperformance for this example is $2mm.

• Sale Outperformance: The areashaded light green represents theafter-tax sale outperformance overthe MMAP if the annual stockgrowth is less than 4.2%. This illustration shows the maximumunderperformance for the MMAP is under $1mm regardless of howlow the underlying stock falls.

Summary of After-Tax Analysis

Hypothetical Comparative After-Tax Analysis — MMAP v. Sale

Maximum Monetization and Asset Protection (MMAP)

Annual Stock Growth (%)

(2.1) (0.7) 0.7 2.1 3.5 4.9 6.3 7.7 9.1 10.5 11.9 13.3 14.7

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

(500,000)

(1,000,000)

(1,500,000)

MMAP Outperformance Sale Outperformance

HypotheticalBreak-Even

4.2%MMAP

Outperformance

Sale Outperformance

What is “equity risk management?”Equity risk management, or stock hedg-ing, is a way for investors to reduce andmanage price risk in concentrated stockpositions. Although holding a stock posi-tion without interruption may haveresulted in significant net worth, it is pru-dent to explore strategies to reduce riskin the biggest component of an investors’net worth, and review methods to createliquidity in a tax-efficient manner.

Can I “roll” into a new MMAP atmaturity?Generally, yes. Many investors who electto deliver cash and retain their stock willraise the cash by entering into a newtransaction at maturity. As the stockprice rises, the lower and upper limitprices will be reset at the newer, higherlevels, and the investor will receive anew up-front payment. This paymentwill be credited against his obligationfrom the original transaction (usuallywith a slight debit or credit) and allowhim to maintain ownership of the stock.

Is there a minimum dollar contract value?The target minimum transaction valueis $2 million in a single stock position.UBS can, however, entertain transac-tions as low as $1 million in certaininstances (i.e., unrestricted stock held individually by a non-affiliate of the issuer).

How does UBS set up their hedge?We will first establish our hedge by selling short shares into the market. In order to sell stock short UBS will borrow shares from the market todeliver to a buyer.

Buying a put, selling a call — can’t I do this on my own?Yes, to some extent. Investors can purchase and sell listed put and calloptions, but both the collar and MMAPare customized transactions thatinvolve private, over-the-counter (OTC)European-style options. These optionsare not exercisable until maturity, whicheliminates the risk that the investor’sstock would be called away during thetransaction. OTC options will also pro-vide the flexibility of cash or physicalsettlement, customized maturity andstrike prices. Finally, investors wouldalso be unable to replicate the MMAPtransaction since no similar financingvehicle exists for listed options.

Who receives dividends and retains voting rights?If the underlying stock pays a dividendat the time the hedge is executed, theinvestor will determine whether he or UBS will receive it. Most investors elect to receive stock dividends and cap them at their current levels. If theinvestor elects to cap the dividends attheir current levels, the investor will beobligated to pay to UBS any dividendsit receives above that cap. Any divi-dends received in a hedging contractare not considered to be “qualifiedincome” and therefore not eligible toreceive the favorable 15% tax rate.

In the MMAP, I receive cash and mystock is posted as collateral — howis this different from a margin loan?The MMAP strategy differs from a margin loan in many ways. First, marginprovides no downside price protection.In fact, if the stock price falls, there is a substantial risk of a margin call and the stock being sold. If an investor is seeking liquidity for diversification,margin will also limit “purpose”bor-rowing to 50%, and may force aninvestor to accept a higher, floatinginterest rate that requires regular debt service. In contrast, the MMAPprotects the investor’s stock position,provides a low, fixed cost of funds, and allows investors to receive up to 90% of value for reinvestment.

Can employee stock options behedged?Both incentive stock options (ISO) and non-qualified stock options (NQSO)present collateral issues. Since optionsare merely a contractual right betweena company and an employee, UBS isunable to perfect its security interest.An alternative collateral arrangementwould be necessary.

Can stock held in a 401(k) or IRA be hedged?No. Prevailing interpretations of ERISA hold that such stock may not be pledged.

Frequently Asked Questions 17

IV. Frequently Asked Questions

18 Tax Considerations

Jobs and Growth Tax ReliefReconciliation Act of 2003On May 28, 2003 President Bushsigned into law the Jobs and GrowthTax Relief Reconciliation Act of 2003(the “Tax Bill”). The most widely publi-cized aspects of the Tax Bill are thereduction in the maximum long-termcapital gains tax rate (from 20% to15%), the reduction of the ordinaryand short-term capital gains rates (from38.6% to 35%) and the reduction ofthe maximum tax on cash dividendspaid to individuals (from 38.6% to15%). These changes affect stockhedging strategies minimally.

If a client hedges a stock that pays adividend with any hedging transactionother than a “qualified covered call,”the prevailing tax opinion is investorswould not receive the new beneficialtax treatment on dividends.

Taxpayer Relief Act of 1997The Taxpayer Relief Act of 1997 (the“Act”) was signed into law on August5, 1997 and included a number ofpoints relating to equity risk manage-ment transactions. The Act specificallydefines a Constructive Sale as a taxableevent. Four types of transactions whereboth upside potential and downside

risk are eliminated were clearly out-lined as Constructive Sale transactions,including: “Short-Against-the-Box,”offsetting notional principal contracts,forward contracts to deliver a “sub-stantially fixed” amount of property fora “substantially fixed” price, and a longpurchase by an investor who has anappreciated “short” position.

Prevailing industry opinion has takenthe view that puts, calls, collars andMMAPs are not constructive sales aslong as the investor is subject to someelement of risk or reward on the equityposition. Factors that may be relevantin determining whether a constructivesale has occurred include the amountof retained economic exposure, use of client borrowing and allocation ofdividends.

Straddle RulesA tax straddle is defined as holding offsetting positions with respect to personal property which is activelytraded. The IRS regulations of May 1,1995, expanded the definitions of“personal property” to include stockpositions, as well. The following points summarize the consequences of straddle characterization:

V. Tax Considerations

• Holding period more than oneyear: If one position is long-termwhen the straddle (hedge) is enteredinto, any loss in either position istaxed as a long-term capital loss. Any gain on closing out the offset-ting position is taxed as a short-termcapital gain.

• Holding period less than one year:If the shares are short-term when thestraddle (hedge) is entered into, theholding period of the shares is elimi-nated and does not begin again untilthe offsetting position of the straddleis closed. Capital gain or loss fromeither straddle position is taxed asshort-term.

• Any loss realized on closing out oneleg of a straddle position is deferreduntil the offsetting leg of the straddleis also closed and the gain/loss is recognized.

• If the client borrows money againstthe straddle position, interest paid on the loan is capitalized (if otherwisedeductible). The amount of interestsubject to capitalization is limited to the excess of interest paid overdividends received on the positionsecuring the loan.

Applicable Tax Legislation and Straddle Rules

Clients should seek their own counsel fortax, accounting and legal advice in lightof their own particular circumstances.

Tax Considerations 19

Collar Assumptions1:• Client has 100,000 shares of

ABC; held greater than one year (i.e., long term)

• Client’s cost basis in stock is $0• ABC currently trading at $100

per share

Tax Consequence Scenario Analysis

Collar • Client executes a 24-month zero-premium collar

– Collar has a Lower Threshold of $90

– Collar has an Upper Threshold of $120


Note: 1 Assumes collar treated as a “single-pay” collar.Bifurcated put and call options to construct the collar is also available, but not illustrated in thisexample.

For tax purposes, LT = Long Term and ST = Short Term

Physical Settlement

Stock finishes below theLower Threshold (i.e., $70)

Stock finishes between the Lowerand Upper Threshold (i.e., $110)

Stock finishes above the Upper Threshold (i.e., $140)

Tax Implications

• Client delivers all shares to UBS and receives $90 per share• Gain on Stock = Lower Threshold Strike – Cost Basis

= $90 – $0 = $90 LT Capital Gain per share

• No sale of stock occurs• No gain or loss on the collar

• Client delivers all shares to UBS and receives $120 per share• Gain on Stock = Upper Threshold Strike – Cost Basis

= $120 – $0 = $120 LT Capital Gain per share

Cash Settlement

Stock finishes below the Lower Threshold (i.e., $70)

Stock finishes between the Lowerand Upper Threshold (i.e., $110)

Stock finishes above the Call Strike (i.e., $140)

Tax Implications

• Client retains all shares and receives $20 from UBS• Gain at Settlement = Lower Threshold Strike – Stock Price at Expiry

= $90 – $70 = $20 ST Capital Gain per share

• No sale of stock occurs• No gain or loss on the collar

• Client retains all shares and pays $20 to UBS• Loss at Settlement = Stock Price at Expiry – Upper Threshold Strike

= $140 – $120 = $20 LT Deferred Loss per share

20 Tax Considerations

Tax Implications

• Client delivers 100% of Stock = 100,000 shares• Gain on Shares = Up-front proceeds – Cost Basis

= $8.5mm – $0 = $8.5mm LT Capital Gain on 100,000 shares

• Client delivers stock worth original notional value= $10.0mm / $110 per share = 90,909 shares

• Gain on Shares = Up-front proceeds – Cost Basis= $8.5mm – $0 = $8.5mm LT Capital Gain on 90,909 shares

• Client delivers stock worth original notional value plus amount above upper strike= ($10mm + $1mm) / $150 per share = 73,333 shares

• Gain on Shares = Up-front proceeds – Cost Basis= $8.5mm – $0 = $8.5mm LT Capital Gain on 73,333 shares

Tax Consequence Scenario Analysis

MMAP • Client executes a 36-month MMAPtransaction on $10mm notional

– Lower Strike is $100– Upper Strike is $140– Client receives up-front

proceeds of 85% of notional or $8.5mm

• Gain on stock is measured by up-front proceeds less cost basis in stock delivered at settlement

Physical Settlement

Stock finishes below the Lower Strike (i.e., $70)

Stock finishes between the Lowerand Upper Strikes (i.e., $110)

Stock finishes above the Upper Strike (i.e., $150)


MMAP Assumptions:• Client has 100,000 shares of ABC;

held greater than one year (i.e., long-term)

• Client’s cost basis in stock is $0• ABC currently trading at $100

per share

Tax Implications

• Client delivers cash value of 100% of Stock= 100,000 shares 3 $70 per share = $7.0mm

• Gain on MMAP = Up-front proceeds – payment at settlement= $8.5mm – $7.0mm = $1.5mm ST Capital Gain

• Client delivers original notional value = $10.0mm• Loss on MMAP = Up-front proceeds – payment at settlement

= $8.5mm – $10.0mm = $1.5mm LT Capital Loss (Deferred)

• Client delivers original notional value plus amount above upper strike= $10mm + $1mm = $11.0mm

• Loss on MMAP = Up-front proceeds – payment at settlement= $8.5mm – $11.0mm = $2.5mm LT Capital Loss (Deferred)

Cash Settlement

Stock finishes below the Lower Strike (i.e., $70)

Stock finishes between the Lowerand Upper Strikes (i.e., $110)

Stock finishes above the Upper Strike (i.e., $150)

For tax purposes, LT = Long Term and ST = Short Term

Legal and Regulatory Issues 21

Rules 144 and 144(k)

The Securities Act Of 1933The Securities Act of 1933 requires that every offer to buy or sell securitiesthat is made in or through the UnitedStates be registered unless an exemp-tion is available. Private transactionsand regular secondary market trans-actions are exempt from registration. The primary objective of the 1933 Actis to promote accurate and completedisclosure about the Issuer to investors.Disclosure is required to be included inthe registration statement filed withthe Securities Exchange Commission(SEC) and in the prospectus. The 1933Act also enhances scrutiny of this dis-closure by Issuers, underwriters andcertain selling shareholders by imposingliability should the disclosure be materi-ally defective.

While secondary market transactionsare generally exempt from registration,the 1933 Act and the rules and regula-tions of the SEC do impose restrictionson certain transactions including: (i)affiliate transactions, (ii) sales of securi-ties acquired in public stock-for-stockmergers/acquisitions by persons thatwere affiliates of the acquired or targetcompany and (iii) sales of securitiesacquired in private transactions that are subject to certain resale limitations.

Rule 144Rule 144 under the Securities Act of1933 permits holders of “restricted”(unregistered) securities and “control”securities (securities purchased in theopen market by an officer or controlperson of the underlying company) tosell those shares in the open marketwithout filing a registration statementprior to the sale, provided certain SECconditions are met:

• Holding Period: Restricted securitiesmust have been fully paid for andheld for at least one year before theycan be sold to the public. (Holdersmay “tack” the holding period ofprior holders if they are unaffiliatedwith the issuer. If, however, theholder is an affiliate, then a newholding period commences for thepurchaser.) Control Securities arenot subject to the Holding Periodrequirement.

• Volume: The number of shares soldin any three-month period may notexceed the greater of (i) 1% of theshares outstanding or (ii) the averageweekly volume as calculated over thefour full weeks prior to the filing ofthe notice of sale. (This is also knownas the “dribble-out provision.”)

• Manner of Sale: All sales under Rule 144 must be in unsolicited bro-ker’s transactions or transactionsdirectly with a market maker.

• Public Information: Adequate cur-rent public information is availableregarding the Issuer.

• Notice: Notice of sale is filed onForm 144 with the SEC and the prin-cipal exchange on which the Issuer’sstock is listed. Forms are valid for 90 days from their filing date. Thenotice of sale should be filed for the full share amount when the sellorder is placed.

Rule 144(k) – Restricted SecuritiesRule 144(k) provides an exemption forthe sale of securities that have not beenregistered and have been held for atleast two years by shareholders who arenot an affiliate or control person of theIssuing company. These securities can besold without the volume or manner ofsale limitations required under Rule 144.

VI. Legal and Regulatory Issues

Clients should seek their own counsel fortax, accounting and legal advice in lightof their own particular circumstances.

22 Legal and Regulatory Issues

Note:1 Control securities are purchased in the open market by an officer or control person of theunderlying company. Control securities are identi-fied by the individual who owns them, usually, acontrol person or affiliate of the issuer. Althoughthey do not bear a restrictive legend, they are considered “control stock” and are subject to Rule 144 requirements.

Rule 145

Rule 145 applies to merger transactionsinvolving a shareholder vote or consentand payment in securities issued pur-suant to a registration statement underRule 145, persons who are “affiliates”with the target or the acquirer are deemedunderwriters of securities received andmay resell those securities only pursuantto a registration statement or the resaleprovisions in Rule 145(d).

Rule 145(d) permits resales if the following conditions are met:

• Public Information: Adequate cur-rent public information is availableregarding the Issuer for the first twoyears from the date of the merger.

• Volume: For the first year followingthe merger, the number of sharessold in any three-month period maynot exceed the greater of (i) 1% ofthe shares outstanding or (ii) theaverage weekly volume as calculatedover the four full weeks prior to thefiling of the notice of sale.

• Manner of Sale: For the first yearfollowing the merger, all sales underRule 145 must be in unsolicited bro-ker’s transactions or transactionsdirectly with a market maker.

For non-affiliates of the issuer, afteryear one all restrictions lapse except the public information requirement.After year two, all restrictions lapse.

Holders who are affiliates of the issuercontinue to be subject to the require-ments of Rule 144 as they apply tocontrol securities for as long as theyremain affiliates.

Summary Table of Rules 144, 144(k) and 145

Hold Public Volume Manner NoticeRule Period Information Limitations of Sale of Sale

144 – Restricted Stock 1 year Yes Yes Yes Yes

144 – Control Stock1 None Yes Yes Yes Yes

144(k) 2 years Not required No limits Not required Not required

145 None Yes Yes Yes Not required (for two years from (for one year from (for one year from (unless andate of merger) date of purchase) date of purchase) affiliate)


Section 16(a)Reporting RequirementsUnder Section 16(a) of the SecuritiesExchange Act of 1934, every officer ordirector of an Issuer and every benefi-cial owner of more than 10% of a classof equity security (“Insiders”) must filereports (Forms 3, 4 and 5)1 electroni-cally with the SEC. All acquisitions, dispositions, non-exempt exercise ofoptions and other derivative securitiesas well as acquisitions and dispositionsof the underlying security are changesin beneficial ownership for Section 16purposes. Change of ownership mustbe reported by the person conductingthe transaction by the second day following the change in ownership.Effective June, 2003, Issuers must provide an electronic link to all Section 16 reports.

Considerations for Insiders

Section 16(b)Short Swing Profit DisgorgementSection 16(b) of the 1934 Act refers to any “profit” by an Insider from anypurchase and sale, or sale and pur-chase, of any equity security of theIssuer (including non-exempt optionsand other derivative securities) withinany six-month period. This “profit”could be the net positive differencebetween the prices of any such buyand sell transactions, or the earning ofpremium from the sale of any optionthat expires worthless within a six-month period. In such cases, the Insidermust “disgorge” to the Issuer such netpositive difference or such premium.

Buying a put, selling a call and otherderivative securities that benefit theInsider as the underlying stock declinesin value are considered “put equivalentpositions” or sell transactions for pair-ing purposes. Certain derivative hedges

may create unexpected “buy” trans-actions for purposes of Section 16(b) (i.e., cash settlement of long put/shortcall positions). Such “buy” transactionsmay be paired with “sell” transactionsin the underlying securities as well aswith derivative “sell” transactionsrequiring disgorgement to the Issuer.Physical settlement of these derivativehedges will mitigate this issue.

Section 16(c) Short PositionsSection 16(c) prohibits Insiders fromholding open short positions. However,certain equity derivative transactionsare permitted as hedges to long posi-tions. Section 16(c) restricts insidersfrom holding net short positions (i.e.,Insiders cannot hedge more commonshares than they own outright).

Note:1 Form 3: This form must be filed upon

becoming an Insider.Form 4: This form must be filed for any changes

in ownership or equity interest.Form 5: An annual notification which must be

filed declaring what interests an Insider has in the company during the year and any changes that took place.

24 Legal and Regulatory Issues

Most corporations limit the frequencyand timing of insider sales — oftenimpeding the ability of employees toadequately hedge concentrated equitypositions. The SEC adoption of Rule10b5-1 potentially provides companyinsiders greater freedom in implementinghedging and diversification strategies.• Purchase or sale of securities is illegal

“on the basis” of insider information• Rule 10b5-1 precisely defines “on the

basis of” and provides an affirmativedefense to selling during periods ofmaterial nonpublic information

• An insider’s transaction is not “on the basis” of insider information if prior to becoming aware of theinformation the person had estab-lished a selling plan

Benefits of Rule 10b5-1• Corporations may permit insider sell-

ing outside of traditional windowperiods, even when employee laterbecomes aware of inside information

• Insiders gain increased flexibility toimplement hedging and diversificationstrategies

• Clearer defenses to insider tradinglawsuits are established

Benefits of Implementing a Rule 10b5-1 Transaction Plan• Provides an alternative defense

against Federal insider trading lawsuits

• Offers an opportunity to executemore frequent transactions throughthe year

• Minimizes exposure to price fluctua-tions during window periods

• Minimizes market impact associatedwith insiders selling only in windowperiods

• Minimizes signaling impact oftenassociated with insider transactions

Rule 10b5-1

Further Considerations• Legal counsel and corporate policies

should be consulted in creating a10b5-1 transaction strategy

• Rule 10b5-1 provides an affirmativedefense (but not a safe harbor)against Federal insider trading law-suits. State laws must be consideredon a case-by-case basis

• Modification or early termination of a Rule 10b5-1 transaction plan mayweaken the affirmative defense

• Public disclosure of the transactionplan may be required for certaininsiders

Steps to Pursuing a Rule 10b5-1 Transaction Plan• Insider and UBS Securities create

customized selling/hedging instruc-tions in compliance with both thecorporation’s trading policies andRule 10b5-1 (when the corporateinsider is not aware of material nonpublic information and inside a trading window)

• The 10b5-1 selling/hedging plan may involve multiple trades at pre-determined intervals

• UBS Securities executes trades ofinsider’s securities pursuant to thecustomized trading plan

• Any transaction proceeds are delivered from UBS Securities to the insider’s account as trades areexecuted

Previous Insider Selling TimelineInsider/employee stock sales are generally restricted during blackout periods, withone important caveat: awareness of material non-public information prevented theability to sell during that time period.

Current Insider Selling TimelineCompanies may now permit insider sales both during blackout periods and duringtimes of material insider knowledge, provided a selling plan is established duringan open trading window and without prior knowledge of inside information.

window blackout window blackout

Free to sell Restricted from selling

Aware of inside information

window blackout window blackout

Selling planestablished

Insider sales permitted

Aware of inside information


Section 13Disclosure for 5% HoldersAll individuals, corporations, partnershipsor other entities who are beneficialowners of 5% or more of the commonstock of a publicly traded corporation inthe U.S. must disclose that ownershipstake by filing a Schedule 13D or 13Gwith the SEC1 within 10 days after suchacquisition. They must also describetheir intention (investment purposes ordesire to influence or control manage-ment.) Furthermore, beneficial owner-ship of warrants, convertible securitiesand other rights to acquire stock thatare currently exercisable (or that willbecome exercisable within six months,or were acquired for control purposes)are also treated as beneficial ownershipof the underlying securities. Once aninvestor is a Form 13 filer, all changes in ownership (including hedging activities) must be reported promptly in an amended filing.

Rule 701 StockIf a client acquired stock through acompensatory benefit plan such as purchase, savings, option, bonus, stockappreciation, profit sharing, thrift,incentive, pension or similar plan, thoseshares might be sold under Rule 701.

The following requirements apply tothe sale of restricted shares under Rule 701 for:

Non-Affiliates• The stock can be sold 90 days after

the issuer becomes subject to thereporting requirements of section 13or 15(d) of the Exchange Act of 1934

Affiliates• The company must meet the same

current public information require-ments of Rule 144

• The volume limitations of Rule 144Eligibility

Eligibility RequirementsAny investor seeking to execute over-the-counter derivative transactions withUBS must be an “accredited investor.”An accredited investor (either alone orjointly with his or her spouse) must havenet worth in excess of U.S. $1 million orhave income over $200,000 ($300,000if joint) per year for the past two years.Over-the-counter option transactionsare carried out as private placementsand are not registered under theSecurities Act of 1933.

Certain products may be offered onlyto investors who are “eligible contractparticipants” under the CommoditiesExchange Act. An individual is an eligi-ble contract participant if he or she hastotal assets in excess of (i) $10,000,000or (ii) $5,000,000 if the transaction is entered into to manage the risk associated with an asset or liability of the individual.

Additional Issues and Eligibility

Note:1 Schedule 13D is for any person or group of per-sons who acquire a beneficial ownership of morethan 5% of a class of registered equity securities.Schedule 13G is a much more abbreviated versionof Schedule 13D. It is only available for use by a limited category of “persons” (such as banks,brokers/dealers, and insurance companies) andeven then only when the securities were acquiredin the ordinary course of business and not with the purpose or effect of changing or influencingthe control of the issuer.

Best Global Risk Management House Euromoney, 2005

No. 1 Distributor of Global Equities (Secondary Cash)Leading Private Industry Survey 2005–2002

No. 1 Trader on the New York Stock ExchangeNYSE broker volumes

No. 1 Share Trader in NASDAQ stocksAutex 2005

No. 1 Global Equity Derivatives for CorporatesRisk 2006–2005

No. 5 All-America Research Team Institutional Investor 2005

Awards

VII. The Businesses of UBSA Global, Integrated Financial Services Firm

Investment BankUBS’s Investment Bank is one of theworld's leading firms in the investmentbanking and securities business, providinga full spectrum of services to institutionaland corporate clients, governments andfinancial intermediaries. Its salespeople,research analysts and investment bankersprovide products and services to theworld’s key institutional investors, inter-mediaries, banks, insurance companies,corporations, sovereign governments,supranational organizations and privateinvestors. For both its own corporateand institutional clients and the individ-ual clients of other parts of UBS, theInvestment Bank provides product innovation, research and advice, andcomprehensive access to the world’scapital markets.

Wealth ManagementWith more than 140 years of experi-ence, an extensive global network that includes one of the largest privateclient businesses in the US, and morethan CHF 1,700 billion in investedassets, UBS is the world’s leadingwealth management businesses, providing a comprehensive range ofservices customized for wealthy individ-uals, ranging from asset managementto estate planning and from corporatefinance to art banking.

Global Asset ManagementThe Global Asset Management business is one of the world’s leadingasset managers, providing traditionaland alternative investment solutions tofinancial intermediaries and institutionalinvestors. The breadth, depth andscope of its varied investment capa-bilities enable it to offer innovative solutions in nearly every asset class.Invested assets totaled CHF 801 billionon March 31, 2006, making it one ofthe largest global institutional assetmanagers, the second largest mutualfund manager in Europe, and thelargest mutual fund manager inSwitzerland.

26 The Businesses of UBS

© UBS 2006. All rights reserved. In the U.S., securities underwriting, trading and brokerage activities and M&A advisory activities are conducted by UBS SecuritiesLLC, a wholly owned subsidiary of UBS AG that is a registered broker-dealer and a member of the New York Stock Exchange and other principal exchanges andSIPC. UBS Financial Services, Inc. is a registered broker-dealer and affiliate of UBS Securities LLC. UBS specifically prohibits the redistribution of this material andaccepts no liability whatsoever for the actions of third parties in this respect.

Equity Risk Management

UBS Securities LLC677 Washington BoulevardStamford, CT 06901

Tel: +1-203-719 7200Fax: +1-203-719 3477Infonet: Products / Equity Risk Management

Although the statements of facts in this report have been obtained from and are based upon sources that the Firm believes to be reliable, we do not guaranteetheir accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this report constitute the Firm’s judgment asof the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitationwith respect to the purchase or sale of any security or derivative product.

This publication provides a general overview of each of the topics addressed, and includes a general description of certain of the U.S. legal, tax and accountingconsiderations that may affect the transactions described herein. The descriptions of such matters are necessarily general, do not address the situation of a particular client and do not purport to be complete. UBS Securities does not provide legal, tax or accounting advice. Clients should seek their own counsel fortax, accounting and legal advice in light of their own particular circumstances.

The investment strategies outlined in this report involve inherent risks and are not appropriate for every investor. Some or all of the strategies may involvetransactions in derivatives, including futures and options. You should refrain from entering into such transactions unless you fully understand the terms andrisks of the transactions, including the extent of your potential loss, which can be equal to, or in certain instances greater than, the full amount of your initialinvestment. Over the counter (“OTC”) transactions are not traded on an exchange or cleared by a clearinghouse. Your counterparty in an OTC transactionwould be the Firm or an affiliate of the Firm.

All Photographs by Daniel Forster

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