Re: MG Metals: summary of VAR methodology and current status

Dear all,

Anjam and myself had a highly productive and informative set of meetings=
=20
with Andreas Barkchis of MG Metals NY on Thursday 20th July in the NY=20
office. Firstly we should say "thanks" to Andreas for being so helpful in=
=20
addressing out numerous requests for information - we look forward to=20
establishing a solid working relationship with him going forward.

Find below a summary of Version_1a for initial rough calculation of MG=20
Metal's VAR.

Also Anjam, Kirstee (from London side) and Cantekin, Grant, Vince and mysel=
f=20
(Houston side) have been working for last 2 days on the spreadsheet VAR=20
model.=20
The current status of this effort and a plan for future progress is=20
summarized in the enclosed document: =20
=20
___________________________________________________________________________=
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V@R methodology for MG Metals positions
Version_1a

Introduction
This document describes the initial rough model for calculations=20
Value-At-Risk for MG Metals. This model will be implemented in a spreadshee=
t,=20
which will serve as a prototype for the RiskTrac implementation.=20

Risk factors
The following positions represent most of MG Metal=01,s risk and will be co=
vered=20
by Version_1a:
- Base metals=01, positions including:
- aluminium;
- copper;
- gold;
- lead;
- nickel;
- silver;
- tin;
- zinc;
Risk related to these positions will be quantified by simulating forward=20
prices for each metal.
- Copper concentrate;
Risk related to these positions will be quantified by simulating TC charges=
.
- Cocoa beans;
Risk related to these positions will be quantified by simulating forward=20
prices for cocoa beans.

Therefore these 10 curves will drive the risk: price curves for aluminium,=
=20
copper, gold, lead, nickel, silver, tin, zinc and cocoa beans plus tc curve=
=20
for copper concentrate.

Assumptions and simplifications:
- For each metal we are going to use a single price curve or all types of=
=20
products (physical, financial, LME traded, Comex traded, scrap, alloy, stoc=
k,=20
etc.);
- Delta, gamma approach for risk on options=01, positions;
=20
Components required to implement V@R model:=20
- current forward prices available from Mercur;
- current implied volatilities available through Reuters;
- current positions from Mercur;
- history of prices required to calculate factor loadings and correlations=
=20
across commodities; =20

Methodology
Version_1a will be based on Risk Matrix approach. We will calculate princip=
al=20
components for each metal and cocoa beans to take in account the correlatio=
ns=20
along the term structure. We will also calculate the correlations across=20
commodities based on prompt month prices history for last 3 months.=20
=20
Portfolio hierarchy
Each position will be assigned to one of the following portfolios under the=
=20
whole portfolio AGG-METALS:
- MG Metal & Commodity Corp.
- MG Ltd.;
- MG Metal & Commodity Company Ltd.;
- MG Metall Recycling GmbH, Ffm;

Under each of these sub-portfolio there will be the following sub-portfolio=
s:
- Comex;
- Frame contract;
- LME;
- LME Alloy;
- LME Metal Index;
- Option Call;
- Option Put;
- Physical;
- Physical Alloy;
- Physical Real;
- Physical Scrap;
- Price Part.;
- Prov. Billing;
- Stock;
- Stock Alloy;
- Stock Comex;
- Stock Physical;
- Stock Scrap;