P aul Sacks, CIO, Aurum Options Strategies, LLC Shanghai Derivatives Market Forum May 29, 2014

1. Application of Gold Options in Enterprise Risk Management Paul Sacks, CIO, Aurum Options Strategies, LLC Shanghai Derivatives Market Forum May 29, 2014

2. Exciting Opportunity • Extraordinary moment in time • Discussion of options, particularly in this amount of allotted time, is more interesting and informative by way of example. • Let’s talk about GOLD • Benefits – ubiquitous academic research • Landscape looks problematic • Improving economic data, QE tapering • Problems (FOR HEDGER AND INVESTORS) • Options strategies, what options can offer • With that said… • “I am the biggest gold bull in the room.” • “I own zero gold.”

3. How Options Mitigate Risk • This is a topic about which I am passionate • I will highlight • What makes options unique • Gold options strategies that can benefit HNW individualsand gold consumers • Some introduction to building blocks • Some more complex option combinations • Examining PnL graphs and comparing pros and cons • A common strategy employed by commercial hedgers and an innovative approach to improve it

4. Options: A Unique Tool • Characteristics that make options unique and interesting • Asymmetric return profile • Time dependency • Strike dependency • Path dependency • Multi-dimensional • Unmatched in their potential for diverse financial “expression”

5. What Next? Source: CQG

6. Okay … Let’s Get Into It • How can we use options to improve our gold exposure? • Starting simple • Vanilla calls and puts • Call option • Debit • Premium at risk • Limited “tenor” typically inexpensive • Long 1 June 1400c at 0.50 USD 0

7. Building On It • Call spread • Still initiated for a debit • Financing • Limited upside • Increasing tenor • Long 1 December 1350c at 35.00 • Short 1 December 1400c at 20.00 • 15.00 debit Profit Spread Price { 0 1350 1400

8. More Complex • 1x2 call spread • Net short calls (-1) • Unlimited risk • Long 1 December 1350c • Short 2 December 1400c • Collecting premium • 5.00 credit Profit 1350 1455 1400 Gold price at expiration

9. Aurum Structure • Lets combine two building blocks • 1x2 call spread + outright call • 1x2x2 (multiple tenors) • Key benefits • Capital preservation - overall short premium • Leveraged upside - net long calls • Key risks • Requires active management, purchasing of front month outright calls, must buy this short dated call

10. Strategy Description by Regime • Possible outcomes • Absolute return area • Uncorrelated to gold • Slight negative beta • Mitigation of downside volatility • Benefits of optionality; no stop outs • Uncorrelated to gold • Beta close to zero • Large potential gains due to leverage • Outperformance relative to long underlying • Correlated to gold • Strong positive beta Price of Gold

11. Beneficiaries • It works well for • HNW individuals that own gold • Investors who want gold-like protection in their portfolio, but don’t want to experience the 2013 downturns. • For them gold represents an insurance play. They know they are not market timers. • They have the potential to make more on an extreme move anyways. • Should also be considered by • Consumers, jewelry makers, etc… • Anyone who inherently benefits from a lower price (cost of input), and conversely is punished by a higher price • WHAT ABOUT COMMERCIAL HEDGERS?

12. Quick Pause… Commercial Hedgers • Gold Mines • Increase predictability • Smooth cash flows • Focus on “core” business • Increase competitiveness • Make profitability a function of how well they run business, not where gold goes

13. Most Common Approach • What is a zero cost collar? • buy a put and sell a call to finance it • Combining underlying with zcc = look familiar? Profit Gold price at expiration

14. Standard Net Result • Gold mine’s new PnL graph with zero-cost collar (50% hedging) Profit Gold price at expiration

15. ZCC – Often Used, But Best? • Zero cost collars are not “zero cost” • Forgo tremendous upside PnL • You are selling low vol, buying high vol Long Put Short Call

16. Back to Aurum Structure • Commercial hedgers need to protect downside, not upside • Remember options are nearly the definition of flexible • Superior hedging strategy for Gold mines • Full participation in upside • Equal flexibility to downside protection price • Selling, not buying, higher priced vol

17. Back to Aurum Structure

18. Back to Aurum Structure

19. Conclusion • Options are unmatched in their ability to enable you to employ financial expressions, manage risk • For consumers, producers and investors • Flexible • Optionality • Efficient leverage • This is why … • “I am the biggest gold bull in the room.” • “I own zero gold.”

20. Disclaimer • This talk has been a quick overview of complicated strategies. It is notintended to be taken as a specific trade recommendation, nor asolicitation of any kind. • Trading options involves risk. Option pricing is impacted by many factors and requires experience. Any of my colleagues or I are willing and happy to discuss risk management strategies in further detail.