PowerPoint Presentation

Paul Sacks, CIO, Aurum Options Strategies, LLCShanghai Derivatives Market Forum

May 29, 2014

Application of Gold Options in Enterprise Risk Management

2Extraordinary moment in timeDiscussion of options, particularly in this amount of allotted time, is more interesting and informative by way of example.Lets talk about GOLDBenefits ubiquitous academic researchLandscape looks problematicImproving economic data, QE tapering Problems (FOR HEDGER AND INVESTORS)Options strategies, what options can offerWith that saidI am the biggest gold bull in the room.I own zero gold.Exciting Opportunity

3How Options Mitigate Risk This is a topic about which I am passionateI will highlightWhat makes options uniqueGold options strategies that can benefit HNW individuals and gold consumersSome introduction to building blocksSome more complex option combinationsExamining PnL graphs and comparing pros and consA common strategy employed by commercial hedgers and an innovative approach to improve it

4Options: A Unique ToolCharacteristics that make options unique and interestingAsymmetric return profileTime dependencyStrike dependencyPath dependencyMulti-dimensionalUnmatched in their potential for diverse financial expression

5What Next?Source: CQG

6Okay Lets Get Into ItHow can we use options to improve our gold exposure?Starting simpleVanilla calls and putsCall optionDebitPremium at riskLimited tenor typically inexpensiveLong 1 June 1400c at 0.50 USD

0

7Building On ItCall spreadStill initiated for a debitFinancingLimited upsideIncreasing tenorLong 1 December 1350c at 35.00Short 1 December 1400c at 20.0015.00 debit

0Profit13501400Spread Price {

8More Complex1x2 call spreadNet short calls (-1)Unlimited riskLong 1 December 1350cShort 2 December 1400cCollecting premium5.00 credit

135014001455ProfitGold price at expiration

9Aurum StructureLets combine two building blocks1x2 call spread + outright call1x2x2 (multiple tenors)

Key benefitsCapital preservation - overall short premiumLeveraged upside - net long callsKey risksRequires active management, purchasing of front month outright calls, must buy this short dated call

10Strategy Description by RegimeAbsolute return areaUncorrelated to goldSlight negative beta

Large potential gains due to leverageOutperformance relative to long underlying Correlated to goldStrong positive betaMitigation of downside volatilityBenefits of optionality; no stop outsUncorrelated to goldBeta close to zeroPrice of Gold

Possible outcomes

11BeneficiariesIt works well forHNW individuals that own goldInvestors who want gold-like protection in their portfolio, but dont 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 byConsumers, jewelry makers, etcAnyone who inherently benefits from a lower price (cost of input), and conversely is punished by a higher priceWHAT ABOUT COMMERCIAL HEDGERS?

12Quick Pause Commercial HedgersGold MinesIncrease predictabilitySmooth cash flowsFocus on core businessIncrease competitivenessMake profitability a function of how well they run business, not where gold goes

13Most Common ApproachWhat is a zero cost collar?buy a put and sell a call to finance itCombining underlying with zcc = look familiar?

ProfitGold price at expiration

14Standard Net ResultGold mines new PnL graph with zero-cost collar (50% hedging)

ProfitGold price at expiration

15ZCC Often Used, But Best?Zero cost collars are not zero costForgo tremendous upside PnLYou are selling low vol, buying high vol

Long PutShort Call

16Back to Aurum StructureCommercial hedgers need to protect downside, not upsideRemember options are nearly the definition of flexibleSuperior hedging strategy for Gold minesFull participation in upsideEqual flexibility to downside protection priceSelling, not buying, higher priced vol

17Back to Aurum Structure

18Back to Aurum Structure

19ConclusionOptions are unmatched in their ability to enable you to employ financial expressions, manage riskFor consumers, producers and investorsFlexibleOptionalityEfficient leverage

This is why I am the biggest gold bull in the room.I own zero gold.

20DisclaimerThis 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.