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Rauxon Energy Co. Sales Presentation

Rauxon Energy Co. Sales Presentation. Stanley Securities September 23, 2010. Introduction. David Lin, Investment Grade Credit Research Shengbiao Luo, Credit Hybrids Sales Casey Wang, Market Risk Management George Wang, Credit Hybrids Trading Peilin Zhang, Quantitative Credit Strategies.

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Rauxon Energy Co. Sales Presentation

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  1. Rauxon Energy Co. Sales Presentation Stanley Securities September 23, 2010

  2. Introduction David Lin, Investment Grade Credit ResearchShengbiao Luo, Credit Hybrids SalesCasey Wang, Market Risk ManagementGeorge Wang, Credit Hybrids TradingPeilin Zhang, Quantitative Credit Strategies

  3. The Objective • Offer counterparty default protection against deep in the money FX Forward: • Counterparty: UJB Financial • Notional: 500MM EUR • Time to maturity: 3 years • Contractual forward price: $1.024/EUR • Spot USD/EUR rate: $1.22/EUR • Current Exposure: $98MM • Need protection against UJB’s gradual financial distress

  4. The Solution Rating Contingent Credit Default Swap (RCCDS) • Credit protection contingent on rating downgrade • Notional of default payoff contingent on mark to market value of FX forward • Significant reduction in protection cost

  5. Payoff Scenario

  6. Term Sheet • Protection Seller: Stanley Securities • Protection Buyer: Rauxon Energy Co. • Trade Date: 10/1/2010 • Expiration Date: 9/30/2013 • Reference Entity: UJB Financial Seller Pays: • Payoff: (FX Forward Market Value)+ × (1 – Recovery) • Credit Event: Downgrade, followed by failure to pay • Settlement: Cash (USD) Buyer pays: • 11 bps on $500MM notional • Standardized quarterly schedule

  7. Deal Comparison 25% reduction in premium compared with full protection

  8. Cash flows UJB downgrades Risk Leg Time Premium Leg

  9. Suitability and Limitations • No protection against out of blue default(client specifically asks for) • May need to remake the FX Forward trade $500,000 to your bottom line

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