Product review by Future Value Consultants

Eksportfinans/Ixis Ixis has enjoyed success in the US with its Dogs of the Dow product. The capital-at-risk investment, which is linked to 10 high yielding NYSE stocks and pays an income of 17.25% per annum, uses the reverse convertible structure in a particularly innovative way

> Product description This one-year investment pays a fixed income of 17.25% per annum. regardless of the performance of the stocks in the underlying portfolio. Income is paid monthly in arrears (at a rate of 1.4375%), the first payment date being February 28, 2007. The portfolio consists of 10 highest yielding stocks on the Dow Jones for 2006 (known as the Dogs of the Dow). They are Pfizer, Verizon Communications, Altria Group, AT&T, Citigroup, Merck & Co, General Motors, E.I. du Pont de Nemours and Company, General Electric and JPMorgan Chase & Co. In addition to the income, the investor receives the full face amount of investment at maturity if

Issuer: Eksportfinans/Ixis Product summary Country of issue: USA This one-year investment is linked to a portfolio of 10 NYSE listed stocks and pays an income of 17.25% per annum. Capital is not protected Currency of issue: USD at maturity if one or more of the 10 stocks fall below 60% of their initial reference price. Product type: SCARPS income (capital at risk)

1. Fixed income of 17.25% per annum Points for: 2. Income paid monthly in arrears

1. Capital is not protected at maturity if any stock falls by more than 60% of its initial reference level Points against: 2. If 60% protection barrier is breached, the amount of capital returned at maturity is dependent of the level of the worst-performing stock

Asset exposure period: 0.99 years (full term length one year)

Pfizer, Verizon Communications, Altria Group, AT&T, Citigroup, Merck & Co, General Motors, E.I. Underlying asset: du Pont de Nemours and Company, General Electric Company and JPMorgan Chase & Co

Final index level definition: Daily closing level of final day of the investment

Investment limits: Minimum of $1,000 and integral multiples thereof

Income options: 17.25% per annum

Wrappers and investment vehicles: Direct investment Offer Opens Transfers by Closes period 29/12/2006 n/a 31/1/2007 Commission 3% Final market Maturity/ Strike set Credit rating of investments made Key dates reading payout S&P’s AA+ 31/1/2007 (according to information from the product provider): 28/1/2008 31/1/2008

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Product reviews.indd 66 12/4/07 12:43:55 Product review by Future Value Consultants

the barrier is not breached or if it is breached (i.e. one or more stocks fall Product assessment by more than 40%) yet recover with the final reference prices of all stocks being at least level with their initial reference prices. To see details about the scoring system, riskmap and probabilities Capital is not protected at maturity if at any time one or more any please see the explanation of the research methodology (page 43) one of these stocks falls below 60% its initial reference price. If the 60%

barrier is breached, the face amount returned to the investor at the end of Investor rating 7.25/10 the one-year investment term is based on the performance of the worst (This rating does not take into account the tax treatment of the performing stock. The potential loss of capital is increased as the capital investment) return is based on the performance of the stock with the lowest final reference price in relation to its initial reference price, not necessarily the Riskmap rating 5/5 performance of the stock that breached the 60% barrier, which could be any of the 10 stocks in the portfolio. To compile the overall scores, this product scored as follows in our An interest payment of 17.25% is significantly above the prevailing different categories: risk-free rate. Any investor considering the inherent risk return ratio of an Transparency 7.5/10 investment, must decide if the increased return is worth the increased risk Value 6.85/10 to capital. The product offers a known and extremely high rate of income. Returns 7.08/10 Whether this fits the investors risk profile will be a matter that must be considered carefully. As discussed above risk to capital is increased because Probability table of product return outcomes the product is linked to the worst performing stock of the 10. (based on simulated performances) The product uses a reverse convertible structure in an innovative way. The high interest payment is made possible from the sale of a put option which translates into risk of loss of capital for the investor. The underlying Outcome range (pa) volatility level is increased by linking the product to the performance of 10 individual stocks as opposed to the index from which they are drawn. less than 33.7% Another factor to consider is the correlation between the 10 stocks, which –5% we have calculated to be approximately 40% historically. The levels of vola- –5% to 0% 1.98% tility and correlation mean that there is a significant chance that the barrier may be breached and if this occurs, sizeable payout may follow. This can be 0% to 5% 1.68% seen from the probability table below which shows most of the probability of capital loss is concentrated in the first “bucket”. 5% to 10% 2.37% The choice of higher yielding stocks also boosts the value of the put option because of the forward levels on the stocks compared to the rest of 10% to 15% 4.68% the index. The higher the price of the put option means that a higher yield can be greater 55.59% offered to the investor. Conversely, the higher option price when consid- than 15% ering the above factors also means that the risk to capital is increased. If the 10 stocks were held directly the actual yields if held in 2006 would 0 10 20 30 40 50 60 70 be approximately 3.6%. In terms of risk to capital, if the stocks were held Probability (total return) directly investors would not benefit from the 60% protection barrier found on this product. However, the amount of capital returned would be based on the average performance of all 10 stocks, unlike this product which once 60% will give a certain amount of comfort and backtests well over the last the barrier is breached, would be linked to the performance of the worst year in that none of the stocks from the current list would have breached performing stock. the barrier. However given that any of the 10 stocks can hit the barrier to knock in the option it is clear that this will not affect the premium greatly. Pricing and risk From a return point of view we note that once the barrier of 60% has This trade is an extremely adventurous trade linked to 10 high yielding been hit the potential loss is already around 40% which doubly wipes out stocks. The yield of over 17% during the year must obviously be financed by the yield picked up. An investor seeking to boost yield in a sensible fashion significant capital risk when the risk free rate is around 5%. The put is priced might consider a component of this investment in a cash portfolio and by considering the worst performer of the 10. This investment strikes a good ask how the downside compares to the risk to get the same yield from a blend between the investment arguments and derivative pricing realities. higher yielding credit portfolio. n

The “Dogs of the Dow” are a well known play each year and given the US The information in this analysis is taken from sources which Future Value Consultants Limited deems culture for stock-picking form a natural choice for any structured product. reliable but no guarantee is made that the information is complete or accurate and it should not be relied upon as such. Any opinions in the analyses represent those of Future Value Consultants Limited at the The first point to notice is that by definition these stocks have high dividend time of writing but are subject to change. All valuations and prices shown are indicative only and do yields, which will help boost the put option value. Secondly the stocks have not imply an offer or commitment of any kind. The analyses do not constitute advice or recommenda- decent volatility and correlations between them. The option on the worst of tions nor should it be relied upon for any purpose. No liability whatsoever is accepted by Future Value Consultants Limited or Structured Products magazine for any loss or expense incurred from using these stocks will therefore generate a high value. The choice of the barrier at these analyses.

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Product reviews.indd 67 12/4/07 12:43:55