Confidential Presentation :

Structured Products Asia Leveraged CMS Note with Knock-Out

19 November 2007

Executive Summary

Executive Summary
Executive Summary

Leveraged short tenor investment with attractive coupon

Monetizing a Structural Risk Premium
Monetary easing cycles have traditionally been associated with inflated forward rates with respect to realized Central Banks act preemptively to manage expectations of growth to allow for the lag in the transmission effects of monetary policy. Historically, the futures markets have overstated the Fed Funds Rate during easing cycles. Substantial yield enhancement can be obtained for Private banks in a strategy that has performed consistently over easing cycles.

High Yield, Short Tenor Instrument on Interest Rate Underlying

When compared to other asset classes, interest rate underlying are characterized by relatively lesser volatility Traditional rates products offer value over longer tenor, and are dependent on tight forwards to translate into attractive coupons Easing cycles present a structural forward rate premium that has historically provided attractive returns on leveraged structures

Non Principal Protected notes that take a view against the overstated forward rates

Leveraged CMS Notes

Provide an attractive 10% coupon over a short 1 year investment horizon on a rates underlying Incorporates a knock out mechanism to buffer against drastic market movements

Trade Overview

Trade Overview
Trade Overview

Upward sloping yield curves present short rates that exhibit a rate bias
Forward Rate Premium
Most market environments present normally shaped, upward sloping yield curves It is well documented that effects of monetary policy impact the real economy with a lag. Existing research indicates a lag of between six and nine months in the US for the effects of change in monetary policy to be transmitted During easing cycles, central banks have tended to act preemptively to reduce downside risks to growth, pushing the realized rates much lower than indicated by the forwards Investors can monetize this forward premium bias by selling cap spread on the forward rates Given the recent upward shift in the USD volatility surface, there is substantial value in this short vol position to generate attractive coupons Additional leverage is employed to accrue attractive coupon levels over a short tenor A non capital guaranteed note is generated on the above idea to generate 10% coupon over a one year A knock out provision is built in to protect investors against adverse market movements
8.0

Realized and Predicted Forward Rates

8.0

6.0

6.0

4.0

4.0

2.0

2.0

0.0 2000

0.0 2002 2004 2006

Predicted 1y1y

Realized 1y

Fed Funds Rate

Forward Rate Bias in Easing Cycles

Distribution 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Le ss than 0% 0-1% 1-2% Forward Bias 2-3% More than 3% 14.17% 6.54% 1.89% 39.09% 38.31%

Investment Rationale
Trade Overview

Curve Dynamics Opportune Timing

Timing and Valuation
Over the last 2 months, the Fed funds rates has been cut by 75 basis points. The futures market is anticipating a further 25 bps of easing by the years end The surprise 50 bps cut on the 18th of September has been a repeated occurrence. Banks preempt markets during Easing Cycles, the Futures markets often overestimate forward rates. Lehman Brothers Global Economics estimates a 3.75% one year target for the Fed Funds Rate, with the unemployment claims numbers unexpectedly increasing in November, there are strong indications that an easing cycle is well on its way Though the forward curve is steeply lower in the short end, one year forwards are significantly higher to provide substantial premium on the short position in the 1year caplets The long position in the 6m1y European receiver arising from the knock out condition is sufficiently out of the money to provide the investor inexpensive downside protection Besides, the knockout provides investor a reduced exposure to market volatility and buffers the large short gamma position on a near the money strike During rate cuts cycles, the note has always provided 110% redemption amount
7.0

Banks Preempt Markets FDTR and ED1

5.0

3.0

1.0 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Actual Target Rate

Futures Predicted 3m Libor

Predicted 1 Year Forwards

4.50%

4.25%

4.00%

3.75%

3.50% Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

1y Swap Forwards

Terms and Conditions

Trade Overview

Summary Terms
Indicative Terms & Conditions
Target Investors Issuer Notional Maturity Issue Price Index Redemption Amount Private Banks & Corporates Lehman Brothers Treasury Co. B.V. USD [ ] 1 year 100% USD CMS 1 Year If there is no Knock-Out event 110% if Index < Strike Max(0,100% + 100 * ( Index Strike)) If Index > Strike
Short Maturity Long Maturity Full Protection Complex Growth

Note Mechanics - Scenario Analysis

Non capital Guaranteed, dollar denominated 1-year tenor note The leverage built in is ideal for private banks seeking short term yield enhancement An element of capital protection can be built in by providing the investor with a knock out option in case the 6 month forward one year rate is above the cap strike Strike is fixed at 4.35%, 40 basis points above the current at the money forward strike of 3.95%. The note knocks out in case the observed CMS 1y rate 6 months from the start date is greater than 4.10%

Product Characteristics

Strike Knock Out Event

At-themoney Forward 1y1y + 0.40% If Index* > Strike 0.25% Observed 6 months from effective date

No Protection Simple Income

Knock Out Payment Index Observation

101% Semi Annual

Note Mechanism
Trade Overview

Leveraged Cap spread on CMS1y with KO protection

Coupon Mechanism Start
Start Date Fix Strike = ATMF 1y1y

T+6 months KO based on 6m1y

Start Date + 6 Months Obs. CMS1y > 4.05%

T+1y Redemption NO
Start Date + 1 year Obs. CMS1y < 4.35%

YES
Knock out Redemption amount = 101%

YES
Redemption = 110%

NO
100%+100*(4.35-CMS1y) Floored at zero

Note Mechanics - Scenario Analysis

Price

Redemption Amounts
4.35% 3.95% NO 4.28 110%
120% 100% 80%

Strike (ATMF = 3.95%) CMS1y 6m from Start Knockout CMS1y at expiry Redemption

4.35% 4.50% YES NA 101%

4.35% 4.00% NO 4.45 95%

60% 40% 20% 0% 3.00%

3.25%

3.50%

3.75%

4.00%

4.25%

4.50%

4.75%

5.00%

Re de mption

Realized CMS1y

Backtesting Results

Backtesting Performance
Backtesting Results

Attractive 10% coupon during Easing Cycles

Backtesting Results
The strategy was backtested* over a 10 year period starting 1997 As noticed in the chart alongside, the strategy has provided consistent coupons over rate cut cycles and has always provided 100% principal at redemption Across all periods, the strategy has provided full principal guarantee 80% of the time The strategy suffers from principal erosion primarily during tightening cycles, where central banks tend to act preemptively to curb inflation The note has redeemed at maturity with full coupon 77% of the time. For investors with a bearish view on the CMS forward rates, an enhanced coupon can be provided without the knockout protection
Distribution 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 4.06% 0-20% 3.70% 3.80% 5.20% 3.70% 80-100% 100-110% 0.00% 20-40% 40-60% 60-80% Redemption Amount 79.45% 120.00 100.00 6.0 80.00 60.00 40.00 2.0 20.00 0.00 1999 0.0 2000 2001 2002 2003 2004 2005 2006 4.0

Historical Performance
8.0

Redemption

Fed Funds Rate

Performance Analysis

* Historical Performance is no guarantee for future results. Data sourced from Lehman Live and Bloomberg

This material has been prepared by Capital Markets Structuring Team Asia and is not a product of Lehman Brothers Research Department. It is for informational purposes only. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are subject to change without notice. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the issuance of this document. Changes in market conditions since the issuance of this document may affect some or all of the levels and prices listed. For firm levels and prices please call the desk. Under no circumstances should this document be used or considered as an offer to sell or a solicitation of an offer to buy any financial instrument mentioned in it. The products mentioned in this document may not be eligible for sale in some states or countries, or suitable for all types of investors; their value and the income they produce may fluctuate and / or be adversely affected by exchange rates, interest rates or other factors. Clients are advised to make an independent review regarding the economic benefits and risks of purchasing or selling the financial instruments mentioned in this document and reach their own conclusions regarding the legal, tax, accounting and other aspects of any transaction in the financial instrument in relation to their particular circumstances. Lehman Brothers enters into transactions on an arms length basis and does not act as advisor or fiduciary to its counter parties except where a law, rule or written agreement expressly provides otherwise. Lehman Brothers and / or its affiliated companies may make a market or deal as principal in the financial instruments mentioned in this document or in related securities, options or other derivative instruments based on them. In addition, Lehman Brothers, its affiliated companies, shareholders, directors, officers and / or employees, may from time to time have long or short positions in the financial instruments, including loans, securities or in options, futures or other derivative instruments based on them. One or more directors, officers and / or employees of Lehman Brothers or its affiliated companies may be a director of the borrower or issuer mentioned in this document. Lehman Brothers or its predecessors and / or its affiliated companies may have acted as agent or arranger with respect to the loans of the borrowers mentioned in this report, and may have managed or co-managed a public offering of or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this document within the last 3 years, or may, from time to time perform investment banking, lending or other services for, or solicit investment banking or other business from any company mentioned in this document. No part of this document may be reproduced in any manner without the written permission of Lehman Brothers. 2007 Lehman Brothers, Inc. All rights reserved. Member of SIPC.