February 1, 2011

Forex Portfolio for February 2011

David Karsbøl  The model returned 0.47%* in January; primarily through long exposure to EURUSD
Chief Economist and EURAUD and short exposure to EURSEK.
dka@saxobank.com
+45 3977 4330
 The model remains bearish on USD and EUR, but has also turned bearish on GBP.

 The model has returned 0.47% YTD*.

 The annualised return since inception is 7.62%*.

 The model is rebalanced monthly on the first Danish business day 12 CET.
Note to clients: The Forex
Portfolio Allocation model
will be relaunched with Allocation in February
changes to methodology
on 1 March 2011. The Forex Portfolio remains firmly negative towards the USD and to a lesser extent
towards the EUR though both net short positions have been reduced in January. The net
short exposure to GBP is nearly negligible now.

The biggest long positions in EUR are against the US dollar, the Norwegian krone, and
the Aussie. The EURUSD long position has, however, been toned down further in January.

The Swedish krona is still the most preferred currency against the EUR, but the long
exposure has been reduced even further in January. The CHF is a close second now,
having seen its exposure increase more than 50% and the EURCHF thus sees the biggest
change to its position.

EUR-denominated account USD-denominated account GBP-denominated account

EUR 1 million USD 1 million GBP 1 million

EURAUD 110,230 AUDUSD -109,712 GBPAUD 110,230

EURGBP 67,600 GBPUSD -41,959 GBPUSD 261,688

EURUSD 261,688 USDCAD 70,458 GBPCAD 70,458

EURCAD 70,458 USDCHF -454,580 GBPCHF -454,580

EURCHF -454,580 USDJPY -34,443 GBPJPY -34,443

EURJPY -34,443 USDNOK 193,004 GBPNOK 193,004

EURNOK 193,004 USDSEK -412,350 GBPSEK -412,350

EURSEK -412,350 EURUSD -129,561 EURGBP -208,635

EURNZD 20,619 NZDUSD -26,568 NZDGBP -42,802

The suggested allocations above are based on an account size of EUR/USD/GBP

1,000,000. A spreadsheet for calculating allocations for custom-sized accounts can be
found under Forex Portfolio Model Allocation at www.tradingfloor.com/fx-equity-research.
 February 01, 2011

The Saxo Bank Forex Portfolio Model

Forex Portfolio: The model was back-tested* from October 1991 to September 2008 during which period
it yielded 106.9% or 0.36% per month before costs in the EUR-denominated account*.
Realized Returns From October 2008 to September 2009 the model was further back-tested on „out-of-
Month Return (%)
sample‟ data to further validate its performance. The model was launched in October 1,
2009.
2009 October 0.32

2009 November 0.68 Saxo Bank Forex Portfolio Model: Realised Results* (Oct. 2009 - )
Accumulated capital
2009 December -0.31 from investing EUR 1
ultimo September 2009
2010 January -0.41 1.4

2010 February 2.10 1.3

2010 March 0.17 1.2

2010 April 0.59 1.1

2010 May 0.96 1.0

2010 June 3.60 0.9

2010 July -1.62 0.8

03/10

12/10
09/09

12/09

06/10

09/10
2010 August 3.38

2010 September -0.80

Single Leverage (7.62% p.a.) Double Leverage (15.51% p.a.) Triple Leverage (23.66% p.a.)
2010 October 0.49

2010 November -1.06 Saxo Bank Forex Portfolio Model: Backtesting Results* (Oct. 1991 - Sep. 2008)
2010 December 1.43 Accumulated capital
from investing EUR 1
2011 January 0.47 15.0

YTD 0.47
12.5
Since inception 10.29
10.0
Since inception
7.62
(annualized) 7.5

5.0

2.5

0.0
1991

1996

1997

1998

2003

2004

2005
1992

1993

1994

1995

1999

2000

2001

2002

2006

2007

2008

2009
Single Leverage (4.67%) p.a. Double Leverage (9.21%) p.a. Triple Leverage (13.59%) p.a.

Saxo Bank Forex Portfolio Model - Monthly returns in backtesting* (%, Oct. 1991 - Sep.
Obs. 2008)
35
30
25
20
15
10
5
0
0.0

6.5
7.0
7.5
8.0
8.5
9.0
9.5
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0

10.0
-10.0

-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
-9.5
-9.0
-8.5
-8.0
-7.5
-7.0
-6.5
-6.0
-5.5
-5.0
-4.5
-4.0

*Past performance disclaimer

This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past performance
displayed on this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is
likely to achieve profits or losses similar to those achieved in the past or that significant losses will be avoided.

Statements contained on this publication that are not historical facts and which may be simulated past performance or future performance
data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such statements involve known
and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this publication may
contain 'forward-looking statements'. Actual events or results or actual performance may differ materially from those reflected or
contemplated in such forward-looking statements.

2
 February 01, 2011

The model input

The model‟s inputs are proprietary individual country indicators, which measure the
underlying economic strength (contraction or expansion) of the following 10 currencies:
NZD, AUD, CAD, JPY, EUR, GBP, USD, CHF, SEK, and NOK. The country indicators, which
are designed to reflect the macroeconomic strength of each economy, are based on 22
individual economic time series for each country.
The allocation signals are generated by changes in spreads between the fundamental
country indicators. More capital is allocated to currencies with relatively strong economic
activity (and positive rate outlook), funded by short positions on currencies with weak
economic activity (weak rate outlook). For example, if the Eurozone fundamental country
index suddenly drops (increases) relative to the US fundamental index, the model, all
else being equal, would reduce (increase) exposure to EURUSD. Additionally, positions
are scaled up or down according to the volatility of the currency crosses in question so
the expected risk-adjusted return for positions in EURCHF is the same as for positions in
the normally more volatile EURCAD.
Allocations are presented as net exposures against EUR, USD, or GBP to reduce both the
number of possible combinations and most illiquid crosses.
Returns are based on Bloomberg monthly carry-adjusted currency data. The model
therefore does not include costs related to minimum trading size, slippage, rollover,
spreads, and taxes.

Allocation update
The model will be published on www.tradingfloor.com by Saxo Bank on the first banking
day of the calendar month. While Saxo Bank publishes the model‟s suggested allocation,
the bank is not responsible for the monthly reweighting of the portfolio.
For a EUR-denominated account, the sum of all EUR positions following the model will
deviate from the amount allocated to follow the model. For example, the holder of a EUR
1 million account might choose to allocate EUR 1 million to follow the model, but the sum
of EUR exposure will not equal EUR 1 million. The reason is that one needs to look at the
net exposures. If the model is long 100,000 EURUSD and short 100,000 EURJPY, the net
exposure in EUR on these two positions is actually zero. The sum of total position sizes in
EUR might therefore deviate from EUR 1 million, since the model is only looking at net
exposures of the currencies in question. The reason is that the model follows 10
currencies, but the net exposures are established via only nine crosses. The sum of all
these exposures is then either net long or short, depending on the model‟s prediction on
EUR itself.

Attractive features
The model is always well diversified and is always in the market. It is therefore not
exposed to “timing issues”. It does not use stops, since the overall volatility of returns
tends to be low (especially on single leverage). One particularly interesting feature is
that returns tend to be almost completely uncorrelated to returns in stock markets
(correlation = 0.10) and other risky asset classes (correlation to the CRB Index is 0.11).
Therefore, if the back-testing since 1991 is indicative of future returns*, it would make a
lot of sense to use part of one‟s portfolio to allocate to the FX Model and thereby
decreasing overall portfolio volatility without lowering returns too much (depends on the
leverage used) or at all.

*Past performance disclaimer

This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past performance
displayed on this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is
likely to achieve profits or losses similar to those achieved in the past or that significant losses will be avoided.

Statements contained on this publication that are not historical facts and which may be simulated past performance or future performance
data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such statements involve known
and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this publication may
contain 'forward-looking statements'. Actual events or results or actual performance may differ materially from those reflected or
contemplated in such forward-looking statements.

3
 February 01, 2011

NON-INDEPENDENT INVESTMENT RESEARCH

This investment research has not been prepared in accordance with legal requirements designed to promote the independence of
investment research. Further it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Saxo Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be
interested in the investments (including derivatives), of any issuer mentioned herein.
None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or
financial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced for
marketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly
or through branch offices (“Saxo Bank”) make no representation or warranty, and assume no liability, for the accuracy or
completeness of the information provided herein. In providing this material Saxo Bank has not taken into account any particular
recipient‟s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein
is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for
any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may
result in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange,
derivates and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculative
trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial
advisor(s) in order to understand the risks involved and ensure the suitability of their situation prior to making any investment,
divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered
to be, neither a comprehensive disclosure or risks nor a comprehensive description such risks. Any expression of opinion may be
personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without
notice (neither prior nor subsequent).
Trade Currency and Price Currency
When an investor trades in the Forex market, they always trade a combination of two currencies (a cross or currency pair) in
which one currency is bought (long) and the other is sold (short). This means the investor is speculating on the prospect of one of
the currencies appreciating in value in relation to the other.
Forex Margin Trading
Margin trading allows investors to buy and sell assets that have a greater value than the capital in their account. Forex trading is
typically executed on margin accounts, and the industry practice is to trade on relatively small margin amounts since currency
exchange rate fluctuations tend to be less than one or two percent on any given day.
Margin trading does involve a certain amount of risk. Since a position is being held that exceeds the actual value of the account, a
trader could incur substantial losses if the market moves against his position. Thus, margin trading requires close monitoring of
margin utilization, i.e. the amount of collateral being used to hold margined positions.
If margin utilization exceeds collateral available for margin trading, positions must be closed, reduced, or additional funds must be
posted to cover the position.
This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past
performance displayed on this publication will not necessarily be repeated in the future. No representation is being made that any
investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be
avoided.
Statements contained on this publication that are not historical facts and which may be simulated past performance or future
performance data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such
statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Additionally, this publication may contain 'forward-looking statements'. Actual events or results or actual performance may differ
materially from those reflected or contemplated in such forward-looking statements.
This material is confidential and should not be copied, distributed, published or reproduced in whole or in part or disclosed by
recipients to any other person.
Any information or opinions in this material are not intended for distribution to, or use by, any person in any jurisdiction or country
where such distribution or use would be unlawful. The information in this document is not directed at or intended for “US Persons”
within the meaning of the United States Securities Act of 1993, as amended and the United States Securities Exchange Act of
1934, as amended.
The Saxo Bank Group is under the supervision of the Danish Financial Supervisory Authority (In Danish: "Finanstilsynet") and is
subject to the Danish Executive Order on Good Business Practice for Financial Undertakings.

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