Guide to the Credit Suisse Global Frontier Markets Index August 2010 Version 1.2

Transcription

1 Version 1.2

2 General Information / Disclaimer The Credit Suisse Global Frontier Markets Index is the exclusive property of Credit Suisse, which has contracted with Standard & Poor's to calculate and maintain the Credit Suisse Global Frontier Markets Index under the terms and conditions ruled by the Master Custom Index Agreement between Credit Suisse and Standard & Poor's.

3 Rules for the Credit Suisse Global Frontier Markets Index (the Index ) (the Rules ) 1 Introduction 1 2 Composition of the Index 2 3 Calculation of the Index 6 4 Publication of the Index 8 5 Complementary information related to the Index policy 8 6 Rules for the Periodic Review of the Index 9 7 Rules for the Operational Adjustment of the Index 9 8 Final Provisions 12 Appendices no I, II and III 14-20

4 1 Introduction Rationale for launching the Credit Suisse Global Frontier Markets Index Emerging markets are not what they used to be. In the past five years, and following a period of unprecedented economic growth, Emerging markets ( EM ) have been able to significantly improve their economic, financial and social profiles. Many markets, which are still seen as "emerging" have now emerged and present characteristics which are closer to developed markets. Looking at key economic indicators such as economic performance, education and the use of technology, one wonders why some countries are still considered as EM. The macroeconomic improvement of Emerging markets has led to an increased convergence of valuations between Emerging and developed markets. Indeed, whilst EM used to trade at an around 50% discount ten to five years ago, that valuation gap has now narrowed. Furthermore in some regions, such as Asia ex-japan, some markets are now starting to trade at a premium relative to developed markets. The key question for investors now is how to identify markets which present the same characteristics exhibited by Emerging markets before they emerged. The typical characteristics traditionally exhibited by Emerging markets include: - Low level of income or GDP per capita ( GDP/capita ) - Early stage of development - High economic growth - Underdeveloped financial markets shown by the ratio of a country s market capitalization to its GDP ( Market cap/gdp ), and often reflected in low valuations - Low domestic consumption. These characteristics can be found in several countries that can be best described as emerging Emerging markets, named as the Frontier markets ( FM ). In our view, investors will now increasingly focus on emerging EM; hence investments in Frontier markets are likely to increase on a medium to long term view. In order to anticipate this increased interest in Frontier markets, the Credit Suisse Global Frontier Markets Index is launched. The Credit Suisse Global Frontier Markets Index measures exposure to an investable universe of countries whose economic and social importance is expected to steadily increase. The Index will provide an indicator that is expected to reflect high growth rates in the selected Frontier market country universe. Page 1/20

5 2 Composition of the Index 2.1 Country selection process Index country universe: The Index country universe is the list of FM countries selected according to the country selection procedure developed by the Index creator (as defined in section 3). The country selection procedure is defined below in sections 2.1 (a) to (c). (a) All countries which have GDP and GDP/capita data available from the International Monetary Fund ( IMF ) database ( and which have a regulated stock exchange on which stocks are listed are considered for inclusion in the Index country universe. (b) From this list of countries, all countries which have GDP/capita of less than or equal to USD 10,000 and Market cap/gdp of less than or equal to 80% are selected for the Index country universe. GDP data are based on the latest available data for the last calendar year from the IMF database and are measured in current dollars. (c) The current Index country universe was determined in April 2008 and consists of 26 countries (see below). The Index country universe will be reviewed every four years by the Index creator, for the first time in April The two quantitative criteria, GDP/capita of less than or equal to USD 10,000 and Market cap/gdp of less than or equal to 80%, may be adjusted at future Index country universe reviews to reflect the level of economic development of all countries at that time. Regions: Countries in the Index country universe are allocated to one of four regions. The four regions are (i) Africa & Middle East; (ii) Asia & Pacific; (iii) Eastern Europe; and (iv) Latin America. The 26 countries in the Index country universe are attributed to each of the four regions as follows: The Africa & Middle East region: - Botswana - Ghana - Ivory Coast - Kenya - Lebanon - Namibia - Nigeria - Swaziland - Tunisia - Zambia; The Asia & Pacific region: - Indonesia - Pakistan - Philippines - Sri Lanka - Vietnam; Page 2/20

6 The Eastern Europe region: - Bulgaria - Kazakhstan - Romania - Serbia - Turkey; The Latin America region: - Colombia - Costa Rica - Jamaica - Mexico - Peru - Venezuela. 2.2 Index regional weighting rule The Index is constructed using the following regional weighting rule: (a) Each of the four regions (as defined in section 2.1) is given a weight that is linked to the ratio of its regional GDP (i.e. the sum of the GDP of all of the countries in the Index country universe in that region (see section 2.1)) to the total GDP of the four regions (i.e. the sum of the GDP of all 26 countries in the Index country universe). GDP data are based on the latest available data for the last calendar year from the IMF database and are measured in current dollars. (b) The weight of each region is then floored at 15% and capped at 35% of the whole Index, to prevent any under- or over-representation of any individual region. The weights of the regions which do not need to be capped or floored (because their weight is between 15% and 35%) will be adjusted proportionally such that the sum of the weights of the four regions still equals 100%. (c) Finally, the regional weights, defined as regional target weightings, are rounded to the nearest multiple of 5%. Based on GDP 2007 data, the current regional target weightings are as follows: - Africa & Middle East: 15% - Asia & Pacific: 25% - Eastern Europe: 25% - Latin America: 35% At each rebalancing, the weight of each region in the Index is set to its regional target weighting e.g. the market capitalization of the stocks in the Africa & Middle East region will represent 15% of the Index market capitalization (see section 2.3 (g)). The regional target weightings are fixed between Index country universe reviews. At each Index country universe review (for the first time in April 2012), the regional target weightings will be reviewed by the Index creator. Page 3/20

7 2.3 Index stock selection and weighting rules Index broad universe: The following stocks are considered for inclusion in the Index broad universe: (i) stocks from all companies which are listed on regulated stock exchanges in the countries in the Index country universe; (ii) ADRs or GDRs of companies which also have stocks listed on regulated stock exchanges in the countries in the Index country universe; and (iii) stocks from companies which are domiciled in the countries in the Index country universe but which are listed on regulated stock exchanges elsewhere. For the Africa & Middle East region, stocks from companies which have revenues in one of the countries in the Index country universe in the Africa & Middle East region and which have more than 50% of their total revenues in Africa and the Middle East (the entire region, not just the countries in the Index country universe) and which are listed on regulated stock exchanges may also be considered. Out of the stocks considered for inclusion in the Index broad universe, those that (i) have a market capitalization greater than USD 100 million; (ii) have an average trading volume over the last 100 business days greater than USD 3 million per day; and (iii) are freely tradable due to the equity and foreign exchange markets being free and well developed; will be included in the Index broad universe. For the Africa & Middle East region, stocks which have revenues from that region but which are listed in countries other than the countries in the Index country universe for Africa & Middle East, as described above, may also be considered for the Index broad universe. This is because without this rule, there would currently be no stocks eligible for the Index broad universe for the Africa & Middle East region. This is due to the local equity and/or foreign exchange markets not being free and well developed and due to a lack of liquidity. If this changes in the future, and there are sufficient stocks in the Index broad universe for this region without this rule, this rule may be dropped. A list of stocks for the Africa & Middle East region is shown in Appendix I. The Index broad universe will be reviewed after each Index country universe review i.e. every four years (for the first time in April 2012). The index universe and weights of the index stocks (selected according to the index stock selection procedure described below) are updated annually at each rebalancing date. Index stock selection: The Index covers the performance of the largest and most liquid companies from the Index broad universe worldwide. The number of companies in the Index may change over time. At the Launch Date, there are 30 companies in the Index. Companies from each region will be selected for the Index according to the "sum of ranking" procedure (see below). The Index constituents will be selected according to the following procedure, at each annual rebalancing (as defined in section 3.5): (a) The number of companies in each region is defined as the regional target weighting multiplied by 30 (total number of companies in the Index). The minimum and maximum number of stocks per region are set at five and ten, respectively, to prevent any under- or over-representation of stocks from any individual region. Based on the current regional target weightings (see section 2.2), there will be five stocks in the Africa & Middle East region and ten stocks in the Latin America region. There will be a minimum of seven and maximum of eight stocks in each of the Eastern Europe and Asia & Pacific regions to give a total of 15 stocks in the Eastern Europe and Asia & Pacific regions (see section 2.3 (f)). If Page 4/20

8 there are not enough stocks in a region in the Index broad universe, fewer stocks than the pre-defined number for that region may go into the Index composition. (b) The companies within each region will be assigned a score according to their rank by (i) market capitalization; and by (ii) average trading volume. Within each region, companies are ranked by market capitalization from high to low and by average trading volume over the last 100 business days from high to low. A company s score will be the sum of its two ranks. If a company does not have historical data for 100 business days for trading volume, the longest period available will be taken. (c) Those stocks which have a market capitalization less than USD 100 million or an average trading volume of less than USD 3 million per day over the last 100 business day period will be excluded from the selection process. This will be determined by or on behalf of the Index creator. This is done to ensure that the performance of the Index is not negatively affected by price disruptions due to a lack of liquidity. In addition, those companies whose stocks are not freely tradable (because the equity and/or foreign exchange market is not free and/or well developed) may be excluded from the selection process at the discretion of the Index creator. (d) Within each region, companies are ranked according to their score (from low to high). If two stocks are equally scored, the company with the higher average trading volume will have the higher rank. The highest ranking stocks (subject to the country and sector constraints described in section 2.3 (e)) will go into the Index composition. (e) The following procedure describes the selection of stocks within each of the four regions. Each stock in the Index broad universe is classified by its country of domicile ( country ) (i.e. one of the 26 countries in the Index country universe) and by its sector according to the Global Industry Classification System ( GICS ). For the purpose of the country classification, all stocks from those companies in the Africa & Middle East region which are included in the Index broad universe because they have revenues in one of the countries in the Index country universe in the Africa & Middle East region and have more than 50% of their total revenues in Africa and the Middle East (the entire region), will be assumed to be from the same country. The following selection procedure is carried out for each region until the point when a region has the pre-defined number of stocks for that region as described in section 2.3 (a). Within each region, the highest ranking stock from each of the different countries represented in that region (according to the stocks country classifications as defined above) is selected for the Index composition, in order of the regional ranking (see section 2.3 (d)). Once one stock has been selected from each country represented in that region, the next highest ranking stock in each of the different countries represented in that region is selected for the Index composition, in order of the regional ranking, as long as that stock is from a different sector to the stock already selected from that country. If that stock is from the same sector as the stock already selected from that country, that stock will not be selected for the Index composition, and the selection procedure will continue in the order of the regional ranking as above, until two stocks from different sectors have been selected for the Index composition from each country represented in that region or until the pre-defined number of stocks for that region is reached. If, within a country there are no other stocks available from different sectors, then a stock from the same sector as the stock already selected from that country will be included in the Index composition, in the order of the regional ranking. This procedure continues, each time looking at the next highest ranking stock in each of the different Page 5/20

9 countries represented in that region in order of the regional ranking and subject to the sector constraint described above, until the pre-defined number of stocks for that region is reached. (f) As per section 2.3 (a), there will be a minimum of seven and maximum of eight stocks in each of the Eastern Europe and Asia & Pacific regions to give a total of 15 stocks in the Eastern Europe and Asia & Pacific regions. Seven stocks are selected for the Index composition for each of the Eastern Europe and Asia & Pacific regions according to the selection procedure described in section 2.3 (e). The remaining fifteenth stock selected for the Index composition is the stock with the higher average trading volume out of the two stocks ranked eighth (according to the selection procedure in section 2.3 (e)) from the Eastern Europe and Asia & Pacific regions. (g) The weighting procedure for the Index at each Annual Rebalancing Date (as defined in section 6.2) is the following: The Index stocks are market capitalization-weighted. Firstly, the weight of each region is set to its regional target weighting, as described in section 2.2, to prevent individual regions from any under- or over-representation in the Index. Secondly, the weight of each country is capped at 20% of the Index, to limit individual countries from dominating the Index. If the regional target weighting is no longer attained after the country cap (e.g. due to there only being one country represented in a region which has a regional target weighting greater than 20%), the regional target weighting will prevail. Thirdly, the weight of each stock is capped at 10% of the Index, to limit individual stocks from dominating the Index. The weights of the stocks are reset at each annual rebalancing. (h) When a stock has several listings or different share classes outstanding, the Index creator has discretion as to which stock and/or listing is to be considered, bearing in mind the liquidity of the stocks, among other factors. Normally, the primary listing will be considered. An ADR or GDR can be included, especially if the ADR or GDR is more liquid than the related stocks. For the purpose of this description, the term stocks shall be interpreted to include such securities. 3 Calculation of the Index The Index is calculated and maintained by Standard & Poor's (the calculation agent ) based on a rule-based methodology developed by Credit Suisse Private Banking Research (the Index creator ), as described in section Price Index calculation The base currency of the Index is US Dollars. The closing price of the Index in US Dollars and Euros is calculated on an end-of-day basis based on each constituent s last available closing price on its primary exchange (subject to 2.3 (h)). For calculation purposes, the Index closes at 5 PM New York time. If it is a holiday in any market, the closing price preceding the holiday will be included in the Index calculation. The calculation methods for the Index are outlined in Appendix II. The calculation will be performed in US Dollars and Euros, using the WM closing spot rates as reported by Reuters. (WM closing spot rates are rates calculated by The WM Company based on: (i) actual traded rates on the Reuters Dealing network; and (ii) rates contributed to Reuters by other leading market participants; at UK time each trading day. WM applies its unique mathematics to Page 6/20

10 those rates to produce independent rates for 156 currencies. The WM closing spot rates are published at around UK time each trading day). The closing Index value is calculated using the closing price of each stock that traded during the day, and adjusted closing prices of the previous trading day for those stocks that did not trade during the day. 3.2 Total return Index A total return Index is calculated and disseminated in US Dollars and Euros on an end-ofday basis, based on the closing prices of its constituents converted into US Dollars and Euros, using the WM closing spot rates as reported by Reuters. 3.3 Computational precision The level of precision for Index calculation is as follows: Index values are published rounded to two decimal places. Share prices are rounded to six decimal places. Shares outstanding are expressed in units. Exchange rates are stated to 14 decimal places. Market capitalization is stated to four decimal places. Index values are calculated to 14 decimal places. 3.4 Cap limit Capping is a procedure which satisfies the suitable weighting of Index constituents and prevents a single region, country or stock from dominating the Index. The Index stocks are market capitalization-weighted. Firstly, the regional target weightings are used to construct the Index on a regional level, as described in section 2.2 and section 2.3 (g). Secondly, the weight of each country is capped at 20% of the Index at each Annual Rebalancing Date, to limit individual countries from dominating the Index. If the regional target weighting is no longer attained after the country cap (e.g. due to there only being one country represented in a region which has a regional target weighting greater than 20%), the regional target weighting will prevail. Thirdly, the weight of each stock is capped at 10% of the Index at each Annual Rebalancing Date, to limit individual stocks from dominating the Index. The weights of the stocks are reset at each Annual Rebalancing Date. The Index capitalization is computed for this purpose. In the first step, if the market capitalization of all stocks in the respective region exceeds the regional target weighting, it will be limited to the regional target weighting. In the second step, if the market capitalization of all stocks in the respective country exceeds the country cap of 20% of the whole Index, it will be limited to 20%. The next smaller integer of instruments resulting in the desired capitalization is used as the new weight for calculating the Index. Page 7/20

11 Where the capped instrument of a company, country and/or region falls or rises below or above its target weighting or above its cap during the year, it may only be raised or lowered again on the following Annual Rebalancing Date, since the above-mentioned procedure is repeated for each rebalancing process only. 3.5 Complementary information The Index composition is determined by the Index creator 8 days, i.e. Thursday, before each Annual Rebalancing Date (the 2 nd Friday in May each year as defined in section 6.2) based on the closing values of that day, by applying the Index rules (as defined in section 2.3) to the Index broad universe. Seven days before each Annual Rebalancing Date the Index creator submits the Index composition to the calculation agent. The final weightings of the Index stocks will be determined by the calculation agent 2 days, i.e. Wednesday, before each Annual Rebalancing Date based on the closing values of that day by applying the Index rules (see sections 2.2, 2.3 and 3.4). The weighting of each stock will be expressed by the number of shares included in the Index. The number of shares required according to the rules-based weighting shall generally be rounded as described in section Publication of the Index 4.1. The price Index and total return Index values are published by the calculation agent as described in sections 3.1 and 3.2 by 6.30 PM New York time The calculation agent retains the right to delay the publication of the Index values, or to suspend or discontinue the publication of the Index values, if it believes that there exist circumstances preventing the correct calculation of the Index. 5 Complementary information related to the Index policy The Index policy will conform to the standard Index policy of the calculation agent. 5.1 Announcements All additions, deletions, share and share changes are normally announced two-to-five days ahead of the effective date. These announcements are sent by to the Index creator. 5.2 Holiday Schedule As long as at least one constituent stock is being traded on a weekday (Monday to Friday), an Index value will be calculated for that day. 5.3 Recalculation Policy Page 8/20

12 The calculation agent attempts to avoid incorrect data that affects the indices on a bestefforts basis. Incorrect share calculations, corporate actions, and exchange rates are corrected immediately. Page 9/20

13 6 Rules for the Periodic Review of the Index 6.1 The general aim of the Index creator with regard to the periodic review is to ensure that the underlying constituents continue to meet the basic principles of the Index (see sections 1 and 2), and that the Index continues to reflect as closely as possible the value of the underlying share portfolio. 6.2 The periodic review of the Index constituents occurs in accordance with the following timetable: Launch Date: 24 July 2008 Annual Rebalancing Dates: The 2 nd Friday in May each year, effective on the following Monday. 6.3 Adjustments in stock weightings and constituents, e.g. additions and deletions, resulting from the periodic review become effective on the Monday following each Annual Rebalancing Date, with the weights based on the closing values of the constituents 2 days before the Annual Rebalancing Date (see section 3.5). 7 Rules for the Operational Adjustment of the Index 7.1 In addition to the periodic reviews, the Index is continually reviewed for changes to the Index composition necessitated by extraordinary corporate actions e.g. special dividends, capital increases and reductions, mergers, takeovers, spin-offs, de-listings and bankruptcy filings involving constituent companies. The aim of the calculation agent when making operational adjustments is to ensure that the basic rules of the Index (see sections 1 and 2) are maintained and that the Index continues to reflect as closely as possible the value of the underlying portfolio. 7.2 Operational adjustments of the selection and/or weighting of the stocks in the Index may not change the Index value. 7.3 Operational adjustments: Changes to the Index composition due to corporate actions or constituent eligibility changes might require adjustments and are described in Appendix III. Generally speaking, changes are effective immediately; i.e. on the same day the corporate action becomes effective (the ex-date). The calculation agent will, where possible, give the Index creator at least 2 business days notice of any interim constituent change. 7.4 Interim constituent changes: Constituent changes may occur between review periods if a specific corporate event makes an existing constituent ineligible. The following events may require a constituent s replacement: Page 10/20

14 Event Merger or acquisition Spin-off Bankruptcy Action If a merger or acquisition results in one constituent absorbing another, the resulting company will remain a constituent and the absorbed company will be replaced with the next eligible company from the same region according to the selection process described in section 2. If a non-constituent company absorbs a constituent company, the original constituent will be removed and replaced by the new entity; provided that it is from the same region and it satisfies the eligibility criteria (see section 2). In any other case, the absorbed company will be replaced with the next eligible company from the same region according to the selection process described in section 2. The weight of the replacement stock entering the Index will be based on its market capitalization. A divisor adjustment is required in order to maintain the continuity of the Index level. If a constituent company splits or spins off a portion of its business to form one or more new companies, the resulting company with the highest market value will remain a constituent. The price is adjusted to Price of Parent company minus (Price of Spin-off company/share Exchange Ratio). Index Shares change so that the company's weight remains the same as its weight before the spin-off (no divisor change). A constituent company will be removed and replaced immediately after bankruptcy filing by the next eligible stock from the same region according to the selection process described in section 2. Exceptions are made on a case-bycase basis. For example, a security might not be removed immediately when a bankruptcy filing is not a result of operating or financial difficulties. The weight of the replacement stock entering the Index will be based on its market capitalization. A divisor adjustment is required in order to maintain the continuity of the Index level. Page 11/20

15 Event Delisting Regulation Action A constituent company will be removed and replaced immediately after being delisted from its local and/or foreign stock exchange with the next eligible stock from the same region according to the selection process described in section 2. The weight of the replacement stock entering the Index will be based on its market capitalization. A divisor adjustment is required in order to maintain the continuity of the Index level. A change in regulation for free access to international investors will affect the Index. Constituent companies from a country, which changes its allowance/access of international investors resulting from e.g. a change of that country's political regime or a war, may be temporarily removed and replaced with the next eligible stocks from the same region according to the selection process described in section 2. The weight of the replacement stock(s) entering the Index will be based on its market capitalization. A divisor adjustment is required in order to maintain the continuity of the Index level. If this country later changes its restrictive policy towards renewed acceptance of international investors, it will become again eligible at the next annual rebalancing. This rule also applies to stocks with sales exposure to the Africa & Middle East region. Page 12/20

16 8 Final Provisions 8.1 This document is published by Credit Suisse for information purposes only and Credit Suisse expressly disclaims (to the fullest extent permitted by applicable law) all warranties (express, statutory or implied) regarding this document and the Credit Suisse Global Frontier Markets Index, including but not limited to all warranties of merchantability, fitness for a particular purpose of use and all warranties arising from course of performance, course of dealing or usage of trade and their equivalents under applicable laws of any jurisdiction. 8.2 Credit Suisse or its affiliates may offer securities or other financial products the return on which is linked to the performance of the Index. This document is not to be used or considered as an offer or solicitation to buy or subscribe for such financial products nor is it to be considered to be or to contain any advice or a recommendation with respect to such financial products. Before making an investment decision in relation to such financial products one should refer to the prospectus or other disclosure document relating to such financial products. 8.3 The current Rules for the Index, including the formulae and procedures for its calculation and construction, are set in section 2 and the following sections of this document and in the Appendices attached hereto. Section 1 of this document contains a general introduction including motivation for launching the Index. 8.4 Credit Suisse is described as Index creator under the Rules. Credit Suisse may transfer or delegate to another entity, at its discretion, the authority associated with the role of Index creator under the Rules. The general terms and conditions applying are ruled by the Master Custom Index Agreement between Credit Suisse and Standard & Poor's. 8.5 Standard & Poor's is described as the calculation agent under the Rules. The calculation agent is responsible for compiling and calculating the Index pursuant to and on the basis of the Rules. 8.6 More generally, Credit Suisse as Index creator retains the final discretion as to the manner in which the Index is calculated and constructed. Furthermore, Credit Suisse as Index creator is the final authority on the Index and the interpretation and application of the Rules. 8.7 Credit Suisse as Index creator may supplement, amend (in whole or in part), revise or withdraw these Rules at any time. Such a supplement, amendment, revision or withdrawal may lead to a change in the way the Index is calculated or constructed and may affect the Index in other ways. Without prejudice to the generality of the foregoing, Credit Suisse as Index creator may determine that a change to the Rules is required or desirable in order to update the Rules or to address an error, ambiguity or omission. Such changes, for example, may include changes to eligibility requirements or construction and weighting Rules. The Rules may change without prior notice. 8.8 Credit Suisse as Index creator may apply the Rules in such manner as it, in its discretion considers reasonable and in doing so may rely upon such sources of Page 13/20

17 information (including as to stock prices, rates of exchange, corporate actions and dividend payments) as it, in its discretion, considers reasonable. 8.9 Credit Suisse as Index creator does not warrant or guarantee the accuracy or timeliness of calculations of Index values and does not warrant or guarantee the availability of an Index value on any particular date or at any particular time. If the calculation agent is unable to calculate the Index in accordance with the Rules it is obliged to inform Credit Suisse as Index creator as soon as possible Credit Suisse as Index creator (including its officers, employees and delegates) shall not be under any liability to any party on account of any loss suffered by such party (however such loss may have been incurred) in connection with anything done, determined or selected (or omitted to be done, determined or selected) by it in connection with the Index and Rules. Without prejudice to the generality of the foregoing, Credit Suisse as Index creator shall not be liable for any loss suffered by any party as a result of any determination or calculation it makes (or fails to make) in relation to the construction or the valuation of the Index and the application of the Rules and, once made, Credit Suisse as Index creator shall not be under any obligation to revise any determination or calculation made by it for any reason The Rules shall be governed by and construed in accordance with Swiss law. Page 14/20

18 Appendix I Index broad universe Africa & Middle East As of April 2008, the Index broad universe in the Africa & Middle East region is listed below. MTN GROUP LTD TULLOW OIL PLC ORASCOM TELECOM HOLDING ACERGY SA FIRST QUANTUM MINERALS LTD RED BACK MINING INC ADDAX PETROLEUM CORP GOLDEN STAR RESOURCES LTD HIKMA PHARMACEUTICALS PLC Telecommunication Services Energy Telecommunication Services Energy Materials Materials Energy Materials Health Care Appendix II Index Calculation Method II.1 Index Formula The formula to calculate the Index and as defined by the calculation agent is: Pi Qi i Index Level = Divisor (1) The numerator on the right hand side is the price of each stock in the Index multiplied by the number of shares used in the Index calculation. This is summed across all the stocks in the Index. The denominator is the divisor. This Index formula is sometimes called a base-weighted aggregative method 1. The formula is created by a modification of a LasPeyres Index, which uses base period quantities (share counts) to calculate the price change. A LasPeyres Index would be: Index i = i P i,1 P i,0 Q i, o Q i, o (2) 1 This term is used in one of the earlier and more complete descriptions of S&P index calculations in Alfred Cowles, Common Stock Indices, Principia Press for the Cowles Commission of Research in Economics, The book refers to the Standard Statistics Company Formula; S&P was formed by the merger of Standard Statistics Corporation and Poor s Publishing in Page 15/20

19 In the modification to (2), the quantity measure in the numerator, Q 0, is replaced by Q 1, so the numerator becomes a measure of the current market value, and the product in the denominator is replaced by the divisor which both represents the initial market value and sets the base value for the Index. The result of these modifications is equation (1) above. II.1.1 Divisor Adjustments The key to Index maintenance is the adjustment of the divisor. Index maintenance reflecting changes in shares outstanding, capital actions, addition or deletion of stocks to the Index should not change the level of the Index. In example, a replacement of a stock with another is accomplished with an adjustment to the divisor. Any change to the stocks in the Index that alters the total market value of the Index while holding stock prices constant will require a divisor adjustment. This section explains how the divisor adjustment is made given the change in total market value. The next section discusses what Index changes and corporate actions lead to changes in total market value and the divisor. Equation (1) is expanded to show the stock being removed, stock r, separately from the stocks that will remain in the Index: ( Pi Qi ) + Pr Qr i Index Levelt 1 = (3) Divisor t 1 Note that the Index level and the divisor are now labeled for the time period t-1. After stock r is replaced with stock s, the equation will read: ( Pi Qi ) + Ps Qs i Index Levelt = Divisor t (4) In equations (3) and (4) t-1 is the moment right before company r is removed from and s is added to the Index; t is the moment right after the event. By design Index Level t-1 is equal to Index Level t. Combining (3) and (4) and re-arranging, the adjustment to the Divisor can be determined from the Index market value before and after the change: ( i P Pi Qi ) + Ps Q Divisor = Index Level = Divisor i Qi ) + Pr Qr ( i t 1 t s (5) Let the numerator of the left hand fraction be called MV t-l, for the Index market value at (t-1), and the numerator of the right hand fraction be called MV t, for the Index market value at time t. Now, MV t-1, MV t and Divisor t-1 are all known quantities. Given these it is easy to determine the new divisor that will keep the Index level constant when stock r is replaced by stock s: Page 16/20

20 MV Divisor = Divisor (6) t ( ) t t 1 MVt 1 As discussed below, various Index adjustments result in changes to the Index market value. When these adjustments occur, the divisor is adjusted as shown in equation (6). In some implementations, including the computer programs used in the calculation agent s Index calculations, the divisor adjustment is calculated in a slightly different, but equivalent, format where the divisor change is calculated by addition rather than multiplication. This alternative format is defined here. Rearranging equation (1) and using the term MV (market value) to replace the summation gives: MV Divisor = (7) Index Level When stocks are added to or deleted from an Index there is an increase or decrease in the Index s market value. This increase or decrease is the market value of the stocks being added less the market value of those stocks deleted; define CMV as the Change in Market Value. Recalling that the Index level does not change, the new divisor is defined as: or MV + CMV Divisor New = (8) Index Level MV CMV Divisor New = + (9) IndexLevel IndexLevel However, the first term on the right hand side is simply the Divisor value before the addition or deletion of the stocks. This yields: Divisor CMV = DivisorOld (10) IndexLevel New + Note that this form is more versatile for computer implementations. With this additive form, the second term (CMV/Index Level) can be calculated for each stock or other adjustment independently and then all the adjustments can be combined into one change to the Divisor. II.1.2 Necessary Divisor Adjustments Divisor adjustments are made after the close meaning that after the close of trading the closing prices are used to calculate the new divisor based on whatever changes are being made. It is then possible to provide two complete descriptions of the Index one as it existed at the close of trading and one as it will exist at the next opening of trading. If the same stock prices are used to calculate the Index level for these two descriptions, the Index levels are the same. Page 17/20

21 With prices constant, any change that changes the total market value included in the Index will require a divisor change. For cataloging changes, it is useful to separate changes caused by the management of the Index from those stemming from corporate actions of the constituent companies. Among those changes driven by Index management are adding or deleting companies, adjusting share counts and other factors affecting share counts or stock prices. Index Management Related Changes: When a company is added to or deleted from the Index, the net change in the market value of the Index is calculated and this is used to calculate the new divisor. The market values of stocks being added or deleted are based on the prices, shares outstanding, and any other share count adjustments. Specifically, if a company being added has a total market cap of $1 billion, the market value for the added company used is $1 billion. The calculations would be based on either equation (6) or equation (10) above. For the Index, the share counts are updated at the annual rebalances. The revisions to the divisor resulting from these are calculated and a new divisor is determined. Equation (10) shows how the impacts of a series of share count changes can be combined to determine the new divisor. II.2 Specifics of the Credit Suisse Global Frontier Markets Index II.2.1 Cap Limit Capping is a procedure which satisfies the suitable weighting of Index constituents and prevents single stocks from dominating the Index (see section 3.4). II.3 Total Return Index Calculation Method For the purpose of calculating the total return Index, each dividend is accounted for by reinvesting it in the overall Index on a daily basis (daily compounding) by using the standard formulas given by the calculation agent (see below). Total net cash dividends (ordinary) for each stock at time t are fully reinvested in the overall Index. Dividends are reinvested on their ex-dividend date and are converted into US Dollars and Euros using the WM closing spot rates as reported by Reuters. Net dividend: The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. The total return Index approximates the minimum possible dividend reinvestment. The rates applied are the current effective rates. The preceding discussions were related to price indices where changes in the index level reflect changes in stock prices. In a total return index changes in the index level reflect both movements in stock prices and the reinvestment of dividend income. A total return index represents the total return earned in a portfolio that tracks the underlying price index and reinvests dividend income in the overall index, not in the specific stock paying the dividend. The total return construction differs from the price index and builds the index from the price Page 18/20

22 index and daily total dividend returns. The first step is to calculate the total dividend paid on a given day and convert this figure into points of the price index: TotalDaily Dividend = Dividend i Shares (11) i Where Dividend i is the dividend per share paid for stock i and Shares are the number of shares. This is done for each trading day. Dividend i is generally zero except for when a stock goes ex-dividend for a dividend payment. Some stocks do not pay a dividend and Dividend i is always zero. This is converted to index points by dividing by the divisor for the underlying price index: i TotalDailyDividend IndexDivid end = (12) Divisor The next step is to apply the usual definition of a total return from a financial instrument to the price index. Equation (13) gives the definition. Equation (14) applies it to the index: Pt + Dt Total Return = 1 (13) Pt 1 and IndexLevelt + IndexDividend t DTR = 1 t (14) IndexLevelt 1 where the Total Return and the daily total return for the index (DTR) is stated as a decimal. The DTR is used to update the total return index from one day to the next: t ( Total ReturnIndex ) ( DTR ) Total ReturnIndex = 1 1+ (15). t t Page 19/20

23 Appendix III Operational Adjustments Corporate Action Related Changes: There are a large range of different corporate actions ranging from routine share issuances or buy backs to unusual events like spin-offs or mergers. These are listed on the table below with notes about the necessary changes and whether the divisor is adjusted. Corporate Action Company added/deleted Change in shares outstanding Stock split Spin-off Special Dividend Rights offering Comments Net change in market value determines divisor adjustment. No share changes are done between rebalances. Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting. No weight change. The price is adjusted to Price of Parent Company minus (Price of Spin-off company/share Exchange Ratio). Index Shares change so that the company's weight remains the same as its weight before the spinoff. When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in Index market value. The price is adjusted to Price of Parent Company minus (Price of Rights Offering/Rights Ratio). Index Shares change so that the company's weight remains the same as its weight before the rights offering. Divisor Adjustment Yes No No No Yes No In the event of corporate actions where cash or other corporate assets are distributed to shareholders, the price of the stock will gap down on the ex-dividend day (the first day when a new shareholder is not eligible to receive the distribution.) The effect of the divisor adjustment is to prevent this price drop from causing a corresponding drop in the Index. Page 20/20