Market risk

• differences in the repricing dates of the Bank’s assets and the liabilities used for purposes of their financing (mismatch risk);
• difference in reference rates used for purposes of determining the interest rate for items with the same repricing dates (basis risk);

• changes in market interest rates which affect the fair value of the Bank’s open positions (interest rate volatility risk); or
• customers exercising options embedded in banking products, which may be exercised as a result of changes in the market interest rates (customer’s option risk).

The Bank engages in activities resulting in the creation of foreign currency positions sensitive to exchange rate fluctuations. At the same time, it strives to limit its exposure to foreign currency risk related to offering its customers products in foreign currencies. The Bank undertakes limited activity on the foreign exchange market in order to generate financial results from short-term arbitrage positions.

The Bank’s exposure to market currency risk is limited by a system of limits. In accordance with the Bank’s policy, the level of market currency risk is managed by the Financial Markets Line by managing the intraday and end-of-day currency position. In order to manage the currency position in an effective and precise manner, an information system is used, providing up-to-date information about:

• currency position,
• the global currency position,
• Value at Risk (VaR) levels,
• the daily result on currency position management.

The values of the currency position in specific currencies, global currency position and VaR are limited and reported by the Financial Risk and Counterparty Risk Division.

For measuring foreign exchange risk, the Bank uses the Value at Risk (VaR) method. It represents a change in the market value of an asset or portfolio of assets with specific assumptions regarding market parameters, over a specified period of time and with a specified probability. It is assumed that VaR for the purpose of currency risk monitoring is determined with 99% confidence level. The calculation of VaR for currency risk takes into account the one-day holding period of currency positions. The VaR methodology is subject to quarterly quality assessment by conducting a test involving comparison of the forecast values and values determined on the basis of actual foreign exchange rate changes, assuming that a given currency position is maintained (historical verification or so-called „back testing”). The comparison period is the last 250 business days.