Citigroup FX Sales and Trading Business Briefing Session

Citigroup FX Sales and Trading Business Briefing Session Fixed Income/Foreign Exchange Victoria Taylor, Corporate FX Sales

Citigroup FX Sales and Trading Where does FI/FX fit in to Citigroup? Global Consumer Global Corporate & Investment Bank Private Client Services Global Investment Mgt. & Private Banking Cards Corporate Banking (GRB) * Investment Advice Life Insurance Consumer Finance Transactional Services * Financial Planning PBG Retail Banking Global Equities * Brokerage Asset Management Global Investment Banking * Global Research Global Fixed Income Treasury Futures Global Rates & Currency Credit Products FI Sales & Research 2 Securitization NSSB

Citigroup FX Sales and Trading Citigroup Foreign Exchange Citi. FX is the largest foreign exchange institution in the world Citi. FX handles approximately 10% of the world’s total FX market volume Citi. FX offers its services to over 1, 900 customers globally with a presence in over 100 countries Citi. FX has over 325 foreign exchange professionals providing 24 hour global coverage Citi. FX offers in-depth research, analytical tools and execution through both traditional and e-channels 3

Citigroup FX Sales and Trading The FX Market u FX Market is the largest financial market in the world u Operates globally, 24 hours a day, 6 days a week u $1. 1 Trillion turnover a day. By comparison, London Stock Exchange’s average daily turnover is approximately $20 billion u Highly Liquid u Highly Transparent u Highly Efficient 4

Citigroup FX Sales and Trading Factors affecting the market Events Technical Fundamental Expectation 5 Economic Market Interventions Political Psychological

Citigroup FX Sales and Trading Market Dynamics – The Players Speculators Corporates Bank Brokers Bank Investors 6 Central Banks

Citigroup FX Sales and Trading FX Trading Floor u Sales Teams – – Investor – Leveraged investor – u Corporate Banks & Central Banks Trading Desks – – STIRT (Short Term Interest Rate Trading) – Options/Derivatives – Proprietary trading – u Spot or cash trading Emerging Markets Research Teams – – Technicals – 7 Economics/Fundamentals Flows

Citigroup FX Sales and Trading What does a Sales job involve? u Managing Client relationships u Market updates u Providing Trade/Hedging ideas to suit customer’s needs u Differentiate yourself from the competition u Position yourself to be the number 1 FX provider 8

Citigroup FX Sales and Trading Customer’s FX needs u Corporates – Day to day business operations outside functional ccy – Hedging FX exposure to minimise the effects of adverse exchange rate movements u Leveraged investors – Speculative - FX now perceived as an asset class in its own right u Investors – Some speculative activity – Managing the FX transactions generated by fixed income and equity trading u Central Banks – – – 9 Stabilise exchange rates - either Support or Suppress Foreign Reserves Management E. g China

Citigroup FX Sales and Trading Example: UK Airline u Corporate customer u Multinational business with operations (revenues/costs) and assets/ liabilities denominated in numerous foreign currencies u Hence, exposure to both Transactional and Translational FX risk u Transaction risk comprises commercial flows in foreign currency (costs and revenues) so earnings are affected when exchange rates fluctuate u Translation risk comprises the translation effects on balance sheet items such as assets and liabilities in foreign currency due to changes in exchange rates 10

Citigroup FX Sales and Trading Example: UK Airline u Primary exposure is to movements in GBPUSD as Fuel costs and Aircraft leases denominated in dollars u xxx, therefore, have in effect a long sterling position, resulting in their earnings being adversely affected by a depreciation of sterling against the dollar u e. g. xxx have $100, 000 dollar fuel costs payable in three months u Therefore, in three months xxx must sell GBP / buy USD to pay the dollar denominated fuel costs u xxx are exposed to GBPUSD movements since a sterling depreciation will have the effect of increasing their costs in sterling, their functional currency 11

Citigroup FX Sales and Trading To hedge or not to hedge a) Remain Unhedged - Sell GBP at the prevailing CABLE exchange rate, three months from now, leaving them exposed to movements during that time In the last 3 months GBP required to buy $100, 000 has been between £ 52. 4 million and £ 56. 5 million. Fuel costs could fluctuate by £ 4. 1 million in a 3 month period b) Hedge their Exposure - hedging is the process of implementing protection for a present or future position which has exposure to market price fluctuations This involves locking in a forward FX rate today that will enable them to buy USD at a known rate in 3 months time 12

Citigroup FX Sales and Trading What does a trader do? u Market making to Sales desks, brokers and other banks u Book running u A trader takes different proprietary positions: · Directional trades, i. e. long or short the market outright · Differential trades, i. e. difference between interest rates in two · 13 different currencies Relative Value trades, i. e. trades where the 6 year price looks wrong given where 5 and 7 years trades

Citigroup FX Sales and Trading Principles Position Taking u Traders may buy and sell currencies to generate a position (either long or short respectively) based upon a certain view that the trader possesses. Position Long If the base currency appreciates the position will yield a PROFIT 14 Short If the base currency depreciates the position will yield a PROFIT

Citigroup FX Sales and Trading Position Taking u The trader may either: · allow a position created from a customer transaction to run i. e. the trader will not immediately cover the position · ask another bank for a price and hit it on the desired side to cover his position e. g. A customer sells $5 m USDJPY at 119. 41 to a spot trader. The trader who believes the USD will appreciate will allow the position to run. If USDJPY appreciates to 120. 00 the trader has made 59 pips of profit on $5 million. USD Profit equals (0. 59 * 5 m)/120. 0 = $24, 583. 33 15

Citigroup FX Sales and Trading Role of a Structurer? u Works between the trader and the sales person u Identify new solutions for clients u Considers relative merits of different instruments given market conditions and objectives u Checks component prices so that he can revert back to the sales person with the overall price and the characteristics of what is going to be marketed to the client u Always thinks about new ideas that “exploit” current market conditions and/or help to achieve the clients goals u Peer analysis, what are similar sectors looking at? 16

Citigroup FX Sales and Trading How the market moves? US employment data EURUSD moved sharply higher after soft US employment data on Friday EURUSD rallied from 1. 2775 -1. 29 17

Citigroup FX Sales and Trading How the market moves? Bo. E rate hike Bank of England surprise 25 b rate hike GBPUSD moves from 1. 87 -1. 8760 18

Citigroup FX Sales and Trading China- Pegged Currency In 1994 China devalued its currency and was pegged to the USD within a band until last year. Now a ‘crawling peg’. CNY can only appreciate within a defined band each day. US calling for quicker appreciation of CNY 19

Citigroup FX Sales and Trading This document does not represent an accounting opinion. The Company should consult with their auditing firm for further accounting opinion on the proposed transactions. ADDITIONAL INFORMATION AVAILABLE UPON REQUEST Citibank, N. A. , London Branch and Citigroup Global Markets Inc, including their parent, subsidiaries and/or affiliates (“the Firm”), may make a market in the securities discussed in this report and may sell to or buy from customers, as principal, securities recommended in this report. The Firm may have a position in securities or options of any issuer recommended in this report. An employee of the Firm may be a director of an issuer recommended in this report. The Firm may perform or solicit investment banking or other services from any issuer recommended in this report. Although information has been obtained from and is based upon sources the Firm believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the Firm 's judgement as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. This report is distributed in the United Kingdom by Citibank, N. A. , London Branch or Citigroup Global Markets Limited, Citigroup Centre, Canada Square, Canary Wharf, London E 14 5 LB, UK. This material is directed exclusively at market professional and institutional investor customers and is not for distribution to private customers, as defined by the rules of the Financial Services Authority, who should not rely on this material. Moreover, any investment or service to which the material may relate will not be made available to such private customers. This material may relate to investments or services of a person outside of the United Kingdom or to other matters which are not regulated by the Financial Services Authority and further details as to where this may be the case are available upon request in respect of this material. If this publication is being made available in certain provinces of Canada by Citigroup Global Markets (Canada) Inc. ("CGMI Canada"), CGMI Canada has approved this publication. This report was prepared by CGMI and distributed in Japan by Nikko Citigroup Limited, it is being so distributed under license. This report is made available in Australia through Citigroup Global Markets Australia Pty Limited (ABN 64 003 114 832), a Licensed Securities Dealer, and in New Zealand through Citigroup Global Markets New Zealand Limited , a member firm of the New Zealand Stock Exchange. This report does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. Citigroup Global Markets (Pty) Limited is incorporated in the Republic of South Africa (company registration number 2000/025866/07) and its registered office is at Citibank Plaza, 145 West Street , Sandown, Sandton, 2196, Republic of South Africa. The investments and services contained herein are not available to private customers in South Africa. This publication is made available in Singapore through Citigroup Global Markets Singapore Holdings Pte Ltd, a licensed Dealer and Investment Advisor. Citigroup Global Markets Inc. is a member of the Securities Investor Protection Corporation (SIPC). © Citigroup Global Markets Inc. , 2003. All rights reserved. Smith Barney is a division and service mark of Citigroup Global Markets Inc. and its affiliates and is used and registered throughout the world. Citigroup and the Umbrella Device are trademarks and service marks of Citicorp and its affiliates and are used and registered throughout the world. Citi. FX is a service mark of Citicorp, Inc. Nikko is a service mark of Nikko Cordial Corporation. Any unauthorized use, duplication or disclosure is prohibited by law and may result in prosecution. Issued by Citibank N. A. , London Branch is regulated by the UK Financial Services Authority 33 Canada Square Canary Wharf London E 14 5 LB 20