Foreign Exchange and Commodities

securities

• Leading investment bank with some 320 employees within bonds, equity and asset brokerage, research and corporate finance

• Offers trading in most commodities through our Commodities Sales Traders• Our FX dealers have more than 30 years experience in the FX market. • Focuses on areas where Norway has its competitive advantage• The acquisition of Öhman Fondskommisjon in Sweden and Finland strengthens our

Nordic presence• #1 ranked IPO manager on Oslo Børs, having managed more than 80 IPOs and listings

since 2004 corresponding to a market share of ~40% • #1 player in the Norwegian primary and secondary high yield bond market• Strong research team covering ~125 companies on Oslo Stock Exchange and ~75

companies on Stockholm Stock Exchange, as well as international coverage in certain key sectors such as Oil Service, E&P and Shipping

• Offices in Oslo, Stavanger, Bergen, Kristiansand, Trondheim, Stockholm, Malmø, Helsinki, New York, Singapore and Rio de Janeiro

• Part of the Pareto Group which also provides services such as shipbroking, project financing and asset management

AboutPAreto securities

why invest incoMMoDities, FreiGht AnD enerGyBoth investors and corporations are finding that taking a financial position in an appropriate commodities market can provide healthy returns or work as good hedge. There are various reasons to why investors and corporations choose to invest in commodity prices.

Risk Management A company may want to offset risks arising out of fluctuations in raw-material prices and will through Commodity Price Hedging benefit by reducing earnings volatility and be insured against accounting blow-ups and earnings restatements. For instance, if a shipping company fears that the price of bunker oil will increase over the next year, it can easily lock in the price of the bunker oil in the futures market, eliminating the risk of increased prices. Portfolio DiversificationGenerally, commodity prices are to a small extent correlated with other assets, due to differ-ent drivers than in, for instance, debt and equity (however, exceptions arise when investing in companies that are greatly influenced by commodity prices). In other words, one can reduce the total risk of a portfolio of stocks and bonds if adding commodity investments.

Substitute to stocks, hedge of a single stock, spread-tradingSome companies are greatly influenced by commodity prices. For instance, oil stocks tend to fluctuate with the oil price, shipping stocks are influenced by freight rates etc. Investors can benefit from investing in commodity prices alongside stocks for hedging pur-poses. Others prefer a pure play on, for instance, the oil price and may trade oil price futures instead of, or in addition to, oil companies.

InvestmentsMany investors have a view on the short-, mid- or long-term price action in a commodity, for instance based on research concluding that a commodity is undervalued in the futures market.

whAt iscoMMoDity DerivAties

To invest in commodity prices, one must first understand how the products are put together. A commodity derivative is a security whose price is derived from the price of an underlying commodity, such as brent oil, natural gas, gold, aluminium etc. Put simply, a derivative is an agreement between two parties that specifies conditions under which payments are to be made between the parties. For instance, this can be an agreement to buy 10,000 barrels of brent oil at 105$/bbl at an agreed date in the future. All the contracts we offer are finan-cially settled, so if the oil price is 120$/bbl at maturity, the buyer will receive a pay-out of $150,000.

The most relevant types of derivatives would be:

Forwards/futuresContracts to buy or sell an asset on or before a future date to a price agreed today. The contracts are financially settled, based on the price on the day of maturity or when the position is closed.

OptionsContracts that give the owner the right, but not the obligation, to buy (call option) or sell (put option) an asset – in this case the right to buy/sell a certain volume at a fixed price in the future. For instance, if a company is worried that they cannot handle an oil price below 90$/bbl, they could buy an option to sell their oil at 90$/bbl in the future. If the oil price goes below, they can still sell at 90$/bbl. If the oil price stays above, the option is worthless at maturity, but the company will gain from a higher oil price in the spot market.

Derivatives can also be combined, enabling an investor or a corporation to cap the downside and opening parts of the upside, forming a price range etc.

When trading in commodity derivatives with us, Pareto Securities would be the counterparty in the transactions. As a client you would not need to become a member of different clearinghouses and exchanges. When trading with us, Pareto Securities would be the name in the market.

About theProDucts we oFFer

Pareto Securities offers a wide spectre of commodity derivatives, where some requires a certain volume to be traded. Below follows a list of products we can offer to our clients, including, but not limited to:

• Oil and Gas• Fuel• Freight• Iron Ore• Precious Metals• Industrial Metals• Salmon• Agriculture• Fertilizer

On the following pages, we will describe the different products in more detail.

Aboutoil AnD GAs

A number of investors have a view on oil and gas prices. Many are exposed oil and gas through long or short positions in equity indices partly correlated with the oil price (like OSEBX) or in companies with a significant oil and gas price exposure.

By trading oil and gas futures directly, investors will have a pure exposure to oil and gas prices, and can, thus, isolate themselves from other risk factors like individual companies’ solidity and management. Sometimes opportunities also arise when, for instance, an oil dependent stock seems undervalued in comparison to the oil price. A meaningful response would in such cases be to go long the oil company and short the oil price. Oil and gas fu-tures can also be used to offset parts of the oil price-related risk when choosing to invest in an oil company, for instance by going long the oil company and at the same time short oil futures.

Pareto Securities has always focused on sectors where Norway has had a competitive advan-tage, and has build up an extensive research capacity on the oil and gas markets.

Several oil and gas products dominate the international markets, but the following pages will introduce three of the main oil and gas products traded in the futures markets.

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Brent Crude

WTI

About oil AnD GAsbrent cruDe

Brent Crude is the biggest of the many classifications of crude oil, such as Brent Crude, Brent Sweet Light Crude, Ekofisk and Forties, and is sourced from different oil fields in the North Sea. Brent Crude is used to price 2/3 of internationally traded oil supplies. Brent is a light and sweet crude oil, though not as light and sweet as WTI. Like other commodities, the fundamental pricing in the Brent Crude Oil derives a number of factors, such as:

• Supply/Demand: Supply from the North Sea region will have the most impact on prices, but OPEC supply policies will also be of importance. On the demand side, Brent is ex-posed to growth rates in Europe, the US, China and other key oil consuming regions.

• Middle East: Political instability in the Middle East has a great impact upon the Brent price, and can be seen as a fear premium upon the price.

• Risk Sentiment: In a world with low interest rates, investors seek returns in hard assets like oil. This may increase the oil price’s correlation with general risk sentiment in the market.

• Inflation Hedging: Oil prices correlate with inflation and investing in oil prices can therefore serve as a hedge against inflation.

TradingBrent Crude is priced in USD per barrel. One future contract is 1,000 barrels.

About oil AnD GAswti

West Texas Intermediate (WTI) is a benchmark crude oil and is considered light and sweet. The quality has been sought after over the years; with lower sulphur content, easier is the refining process.

Traditionally, WTI has been the main benchmark and Brent Crude has been trading at a discount to reflect quality. However, supply disruptions, storage challenges at Cushing (WTI pricing point) and the demand for middle distillates from Asia, WTI has lately been trad-ing on a discount to Brent. The WTI futures contract on Nymex is still, however, the most actively traded commodity in the global futures markets.

The price drivers are similar to those of Brent Crude, but WTI is more dependent on supply from the Midwest and Gulf Coast regions in the US and upon the economic growth in the US relative to the world.

TradingWTI is priced in USD per barrel. One future contract is 1,000 barrels.

About oil AnD GAsnAturAl GAs (henry hub)

Natural Gas is colourless, odourless and energy-rich, consisting mainly of methane. It can also contain co-products like ethane, propane and butane, and these are called natural gas liquids (NGLs) when removed from the gas stream. “Henry Hub” is a point on the pipeline system in Louisiana, USA, and works as the main pricing point for natural gas futures in the North American natural gas market.

Natural Gas prices have traditionally been anchored in a long-term relationship with crude oil prices, but short- to medium-run dynamics can result in considerable variation between the two. In addition to demand from the American and global economic growth, other fac-tors may affect the supply/demand relationship:

• Weather and seasonality: Low winter temperatures will drive up residential and com-mercial demand and, thus, natural gas prices. There is typically more demand for natu-ral gas over the winter. However, high summer temperatures will have the same effect, through extensive use of air condition in American households.

• Coal-to-gas switching: Falling natural gas prices have led utilities to shift their power generation from coal to gas.

• Storage and production disruption: Higher gas storage levels indicate increased avail-ability of gas supply and will suppress prices and vice-versa.

• Regulation and lease provisions: Drilling to hold onto contracting provisions such as held-by-production leaseholds has led to over-supply and declining prices. More restrictive regulation of hydraulic fracking or political initiatives to increase the US LNG export trade could lead to higher prices.

TradingNatural Gas is priced in USD per mmBtu (million British thermal units). One future contract is 10,000 mmBtu.

AboutFuel

Besides investors having a view on fuel prices, corporates can also benefit from fuel deriva-tives. There are several benefits of hedging the fuel price risk, be it bunker oil, gasoil, diesel fuel or other fuel variants.

By hedging the fuel price through fixed price swaps or options, corporations will experience stabilised cash flows and protected margins. Fuel products are normally trading in relation to brent crude oil.

Examples of fuel products we offer:

Bunker OilPriced in USD per metric tonne. Settled monthly against the arithmetic average of Platt’s assessment.

GasoilPriced in USD per metric tonne.

Jet FuelPriced in USD per metric tonne.

AboutFreiGht

As in other commodities markets, the relationship between supply and demand determines most of the price action in the freight market. FFAs (Forward Freight Agreements) can be used for investments or to offset price risks in the freight markets.

Among the natural buyers of FFAs, we see mining companies, end users or co-operations with excess cargoes. Sellers would similarly be ship-owners and co-operations with excess tonnage. Investment banks, hedge funds and investors do also provide liquidity to the market place.

The freight derivatives market was created to enable market actors to minimize the future risks of shipping goods. FFAs are based upon the pricing from the London-based Baltic Ex-change and Platts. For instance, the Baltic Dry indices prices various dry bulk routes, such as common routes for capesize, supramax, panamax and handy-size.

Pareto Securities offers trading in both the dry bulk market and the tanker market, and is at the forefront when it comes to trading execution.

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Baltic Capesize TC Avg USD/Day

AboutinDustriAl AnD Ferrous MetAlsIndustrial metalsIndustrial metals are non-ferrous metals, such as aluminium, copper, lead, zink, nickel and tin. The commodity exchanges are dominated by trading in aluminium, copper and zinc contracts. The production of aluminium is greater than the output of all other industrial and precious metals combined, if we rule out steel production. One key price driver over the last decade has been the demand from China.

Iron OreFerrous metals contain an considerable amount of iron, such as iron ore. Iron Ore is one of the most well supplied of all metals. Ideally, iron ore only contains iron and oxygen, but the purity of iron ore is dependent on the presence of silica, phosphorus, aluminium and sulphur. As the primary input into iron and steel production, it is one of the most consumed com-modities in the market. The iron ore price is depended on iron content and moisture levels. Pareto Securities offers trading in both iron ore and steel products.

TradingPriced in USD per metric tonne. When trading iron ore futures, the price is based upon the TSI 62% Fe index.

Precious metals are rare metals of high value, such as gold, silver and platinum group metals (platinum, palladium, iridium, osmium, ruthenium, and rhodium).

They have industrial uses, in addition to their uses in art and jewellery. For gold, 52% of the total gold consumption is accounted for by the jewellery industry. Silver is, on the other hand, relatively more important to the industry sector. The prices of such metals are driven by their practical use, but also by investments. Gold, for instance, is widely recognised as a safe haven.

Another feature that distinguishes precious metals, and most importantly the gold market, from other metals, is that annual mine production is less than the total above ground stocks. For gold, the mine production is around 10% of the total above ground stock. This implies that the gold forward curve tends to be in contango.

AboutPrecious MetAls

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AboutAGriculturAl ProDucts

Agricultural products can broadly be grouped into fibers, foods, fuels and raw materials. When it comes to agricultural products, the global production is dominated by the US and China. Their combined output of important agricultural products such as corn, wheat, sugar and soybeans is double that of their rivals in this segment (India and EU). However, the US is an important exporter of agricultural products, while China is becoming dependent on agricultural imports.

Corn and wheat products dominate world production. Wheat production has declined over the last years, while production of corn has increased. Other agricultural products are other grain and oilseed products, lumber and other forestry products, dairy products and soft prod-ucts, such as cocoa, coffee, cotton and sugar.

Norway is a major salmon exporter, and Norwegian salmon farmers benefit from rising salmon prices. Similarly, companies buying salmon, such as European super market chains and processors, would want to lock in a low price when opportunities arise. As with other commodity markets, the market actors use the futures market to protect their margins. Pareto Securities offers solutions and advice on how to hedge exposures to the salmon markets.

Investors in salmon companies trading on, e.g., Oslo Stock Exchange can also benefit from trading salmon futures. This can provide investors with a direct exposure to salmon prices, and can work as both an investment and a hedge. By going short (long) the salmon prices, while at the same time going long (short) stocks with salmon price exposure, an investor can effectively offset parts of the risk associated to fluctuations in the salmon prices.

AboutsAlMon

AboutForeiGn exchAnGe

Pareto Securities offers several products for trading in foreign exchange. Choose between spot deals, forward contracts, currency swaps or FX option strategies. Our solutions enable our clients to protect themselves from adverse exchange rate movements in order to protect their margins.

Pareto Securities covers all time zones and offers competitive rates when trading in all major currency pairs. We also provide our customers with market updates and proactive recommen-dations concerning currency movements and hedging strategies.

Our dealers have more than 30 years of experience in the FX market. They have experience with large FX transactions with minimal rate movements, in-debt know-how on sophisti-cated FX products, solid macro research experience and acknowledged expertise in trading strategies.

AboutFx ProDucts

We offer competitive spreads and excellent customer follow-up services in all FX markets, and can offer products within the following categories:

Spot TransactionsSell or buy a given amount of foreign currency at a pre-agreed exchange rate with delivery (usually) two days later.

Forward TransactionsSell or buy a given amount of foreign currency at a pre-agreed exchange rate on a future date. Can be used to eliminate exchange rate risk.

FX SwapsSimultaneous purchase and sale of one currency for another with two different value dates.

FX OptionsDerivative instrument that gives you the right, but not the obligation, to exchange one cur-rency into another currency at a pre-agreed rate on specified date. Options solutions can potentially improve your exchange rate fixings and at the same time protect you against a worst case scenario.

securities

Pareto Securities AS, Dronning Mauds gt. 3, Postboks 1411 Vika, N-0115 OSLO

+47 24 13 39 39, online@paretosec.com, www.paretosec.com

Fx and commodities trading desk: +47 22 87 87 93