investment strategy in an era of high market volatility

HOW TO B.O.B. ALONG IN A SEA OF VOLATILITY

Investment strategy in an era ofhigh volatility and no market direction

Timing is everythingversustiming is worthless

With almost every indicator positively correlated, the timing of buying and selling securities demands a new investment decision strategy.

If all indicators are bullish we can definitively state that there is a very high probability that they will turn bearish, we just cannot say when.

Trend lines go nowhere. Performance tanks but claims persist.

In this market every strategy based on predictive behaviour of the market is doing relatively poorly and at the same time every portfolio manager has an index to measure themselves favourably against.

I

The safe nest of capital preservation is cracked

The era of buy quality assets and hold is over.

To maintain asset value above the rate of inflation demands an investment strategy that was previously defined as ‘excessively risky’.

To sit and wait for the market to stabilize and regain a firm secular bullish trend is the new ’risk’.

You are not in safe hands

Hedge funds not on a roll

The hedge funds have not performed well

Complexity of structured products have not yielded any market advantage

Multi-Strategy Hedge fund Index for 2011 was under water

A redefinition of risk and uncertainty

As systems evolve, they get more complex. (WTO, Euro currency zone, BRICS)

As systems become more complex they become more unstable

As systems become more unstable the components of the system must become more flexible

Therefore, new flexible strategies are needed

A new investment strategy

Technical trading will not work.

Looking for trends will only frustrate

Sitting on cash will result in loses to inflation.

Let the market come to you. Find appropriate strategies for particular moments.

An Iterative strategy strate

Make a series of short term decisions

Do Not: hold cash, predict the economy, identify the next disaster, chase the market, follow the cash, panic and/or despair.

DO develop strategies that exploit volatility in a no direction market and protects your portfolio from unnecessary risk. Be liquid and ready for the return of a secular boom.

RBC auto-callable Notes are the foundation investment

What are the features of these bonds?

RBC Auto-Callable Phoenix Notes: bank issued equity linked notes that are not principal protected. They represent senior, uninsured deposit obligations of the Royal Bank of Canada.

Coupon payments, monthly or quarterly Automatically callable at observation

periods depending on the performance of the underlying assets

Conditionally principal protected at maturity

WOF Phoenix how does it operate?

Please open your first hand out

Step 1: Select the appropriate Bond

1: single , pairs, triples or composite

2: term ; 8 months, year 18 months, or longer

3: coupon rate 10 to 20 %

4: floor: 50% to 80%

5. benchmark dates: monthly quarterly,

6: redemption terms; cash or kind

R epresentati ve Ter ms –N ovem ber 2010.Ter m:24 m onthsU nderl yi ng A ssets: A l coa (A A – N YSE) & G eneral El ectr i c (G E -N YSE)Cur rency: U SD (CA D hedge provi di ng si mi l ar pay-off )Coupon per Month: 1. 25% (15% per annum ) i f underl yi ng(s) at observat i on poi nts > / = Coupon B ar ri er A utoCal l abl e Monthl y: I f underl yi ng( s) at observati on poi nt > / = 100% of str i ke l evel (s

Three year range analysis of target Blue chip stocks

Rim ( red) is rejected AAPL,WFC,MSFT,APPL,JPM

,GE,FCX,,CAT, AMZN, KO , VALE, PBR are accepted

Step 2: Multiple purchases of WOF callable Phoenix bonds

Guidelines :

1. Avoid duplication2. Vary call dates

and terms3. Diversify sectors4. Include

complements in pairs or triplets

5. Purchase monthly6. Diversify into

international markets

AutoCallable Phoenix Note JAutoCallable Phoenix Note F AutoCallable Phoenix NoteMAutoCallable Phoenix NoteA AutoCallable Phoenix NoteMAutoCallable Phoenix NoteJ AutoCallable Phoenix NoteJ AutoCallablePhoenixNoteAUAutoCallable Phoenix Note S AutoCallable Phoenix Note O AutoCallable Phoenix Note N AutoCallable Phoenix Note D

Step 3: Acquire leverage from bank using WOF Phoenix contract as collateral

In order to increase the rate of return, a leveraging exercise is critical.

Leveraged debt creates currency hedge

Bank leverage

Step 4: Use call spread option strategy to exploit volatility to maximize monthly return

Monthly/quarterly return on portfolio of bonds assured if contract above floor on measurement day

If any stock is under water as it approaches measurement moment, an option spread strategy is implemented, to maximize returns.

Option spread contract collapsed once monthly measurement date is passed or wait until contract expires.

Step 5: Minimize risk of capital loss at maturity of WOF bond

As long as stock price at maturity is above floor, 100% capital returned

If stock is below floor, purchase options of negative correlate to cover the potential loss at maturity

If market is in bear cycle, then determine the best fit; (gold, VIX TBs, Euro/US) to include in option purchase. Objective to lose no more than 50% of potential loss upon maturity.

Negative Correlates

BoB’s performance since January 2011

Please open your second hand out

Description $ Invested Periodic

Yield Stock 1 Initial Price LASTBarrier Price

% Away From

Barrier Stock 2 Initial Price LASTBarrier Price

% Away From

Barrier

Initial Valuation

Date

Final Valuation

Date

WFC/MSFT 2 yr Monthly pay 70% barrier $ 250,000 1.22% WFC-us $ 31.81 28.59$ $ 22.27 20% MSFT-us $ 28.47 27.47$ $ 19.93 26% 19-Jan-11 22-Jan-13APPL/JPM 6mnth Monthly pay 80% barrier 100,000$ 1.35% AAPL-us 342.62$ 414.54$ 274.10$ 41% JPM-us 45.96$ 34.78$ 36.77$ -4% 23-Feb-11

CLOSED 8/23/2011

SLB/POT 1 yr Monthly pay 65% barrier 100,000$ 1.02% SLB-us 93.26$ 68.20$ 60.62$ 8% POT-us 58.93$ 43.44$ 38.30$ 9% 31-Mar-11 02-Apr-12GE/FCX 1 yr Monthly pay 70% barrier 100,000$ 1.55% GE-us 20.53$ 18.40$ 14.37$ 20% FCX-us 55.77$ 39.24$ 39.04$ 0% 04-Apr-11 04-Apr-12CAT/AMZN 1 yr Monthly pay 70% barrier 100,000$ 1.30% CAT-us 108.85$ 94.64$ 76.20$ 17% AMZN-us 185.42$ 175.85$ 129.79$ 25% 25-Apr-11 25-Apr-12GDX/KO 1 yr Monthly pay 65% barrier 100,000$ 0.95% GDX-us 60.27$ 64.11$ 39.18$ 41% KO-us 68.17$ 71.23$ 44.31$ 39% 16-Aug-11

CLOSED 09/16/2011

VALE/PBR 1 yr Monthly pay 70% barrier 100,000$ 2.50% VALE-us 23.87$ 25.41$ 16.71$ 36% PBR-us 23.30$ 27.01$ 16.31$ 46% 29-Sep-11

Closed 10/31/2011

VALE/PBR 1 yr Monthly pay 70% barrier 100,000$ 2.29% VALE-us 24.61$ 22.86$ 17.23$ 23% PBR-us 26.17$ 26.23$ 18.32$ 30% 01-Nov-11 16-Nov-12AAPL 18mnth Quarterly pay 70% barrier 100,000$ 3.25% AAPL-us 366.99$ 414.54$ 256.89$ 43% 23-Nov-11 23-May-13

Settlement

Cash

Physical

Cash/Physical

Cash/Physical

Cash/Physical

Cash/Physical

Cash/Physical

Cash/Physical

Cash/Physical

Hedges $ Invested #

Contracts Ticker

Initial Price per

Contract

Last Price per

Contract

Total Spent/Received on Hedge

Current Value of Hedge

Gain (Loss)

% Gain (Loss)

Total Gain (Loss)

Expiration Date

1Lloyd Baron #8120176022

Hedge: 15 US Treasuries (TLT) Sept. $100 strike Calls 9,150$ 15 TLT1117I100-US 6.10$ 10.45$ 9,150$ 15,675$ 4.35$ 71% 6,525$ 16-Sep-11


Hedge: 5 Gold (GLD-us) Sept $160 strike Calls 5,500$ 5 GLD1117I160-US11.00$ 21.60$ 5,500$ 10,800$ 10.60$ 96% 5,300$ 16-Sep-11Subtotal: 14,650$ 14,650$ 26,475$ 11,825$


Hedge: Sold 10 FCX-us October 36 strike Calls 1,000$ (10) FCX1122J36-US 1.00$ 0.29$ 1,000$ 290$ 0.71$ 71% 710$ 21-Oct-11


Hedge: Bought 10 FCX-us October 40 strike Calls (300)$ 10 FCX1122J40-US 0.30$ -$ (300)$ -$ (0.30)$ -100% (300)$ 21-Oct-11Subtotal: 700$ 700$ 290$ 410$


Hedge: Sold 10 FCX-us November 37 strike Calls 1,830$ (10) FCX1119K37-US 1.83$ -$ 1,830$ -$ 1.83$ 100% 1,830$ 18-Nov-11


Hedge: Bought 10 FCX-us November 40 strike Calls (730)$ 10 FCX1119K40-US 0.73$ -$ (730)$ -$ (0.73)$ -100% (730)$ 18-Nov-11Subtotal: 1,100$ 1,100$ -$ 1,100$


Hedge: Sold 10 FCX-us December 37 strike Calls 1,101$ (10) FCX1117L37-US 1.10$ 0.75$ 1,101$ 750$ 0.35$ 32% 351$ 17-Dec-11


Hedge: Bought 10 FCX-us December 40 strike Calls (361)$ 10 FCX1117L40-US 0.36$ 0.01$ (361)$ (10)$ (0.35)$ -97% (351)$ 17-Dec-11Subtotal: 740$ 740$ 740$ -$


Hedge: Sold 10 FCX-us January 37.50 strike Calls 1,800$ (10) FCX1221A37.5-US1.80$ 2.42$ 1,800$ 2,420$ (0.62)$ -34% (620)$ 21-Jan-12


Hedge: Bought 10 FCX-us January 39.50 strike Calls (940)$ 10 FCX1221A39.5-US0.94$ 1.14$ (940)$ (1,140)$ 0.20$ 21% 200$ 21-Jan-12Subtotal: 860$ 860$ 1,280$ (420)$

Cash

Cash

Cash

Settlement

Cash

Cash

Cash

Cash

Cash

Cash

Cash

Client Description

Interest Payments Received

Total: Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12

Horizon Pacific International #8120176428

WFC/MSFT 2 yr Monthly pay 70% barrier $ 36,600 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 3,050$ $ 3,050 $ 3,050 $ 3,050

Lloyd Baron #8120176022

APPL/JPM 6mnth Monthly pay 80% barrier $ 8,100 $ 1,350 $ 1,350 $ 1,350 $ 1,350 1,350$ 1,350$


SLB/POT 1 yr Monthly pay 65% barrier $ 8,160 $ 1,020 $ 1,020 1,020$ 1,020$ 1,020$ 1,020$ $ 1,020 1,020$


GE/FCX 1 yr Monthly pay 70% barrier $ 12,400 1,550$ 1,550$ 1,550$ 1,550$ 1,550$ 1,550$ 1,550$ 1,550$


CAT/AMZN 1 yr Monthly pay 70% barrier $ 10,400 1,300$ 1,300$ 1,300$ 1,300$ 1,300$ 1,300$ 1,300$ 1,300$


GDX/KO 1 yr Monthly pay 65% barrier $ 950 950$


VALE/PBR 1 yr Monthly pay 70% barrier $ 2,500 2,500$

Lloyd Baron #8120176022 $ 4,580 2,290$ 2,290$


AAPL 18mnth Quarterly pay 70% barrier $ -

Sub Total Revenue: 83,690$ 3,050$ 4,400$ 4,400$ 6,970$ 8,270$ 8,270$ 8,270$ 7,870$ 4,350$ 9,420$ 9,210$ 9,210$

Interest Periods:

While the bull slumbers what will you do?

Projection for 2012-2013

Objective: to create a $12 million BoB fund

Benefits:

Choose bonds in primary market

Diversify to targeted blue chip stocks

Create new flexible contracts with specific parameters

Lower commission fees

Generate higher profits

Prescription for Expansion

investment strategy in an era of high market volatility

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