Market risk
Risk type
Risk in non-OESD countries
58 Rabobank Group Annual Report 2004
Organisation and risk management
Market risk relates to changes in the value of the trading portfolio as a
result of price movements in the market. Price changes include prices
of interest rate products (interest rate), equities, currencies, certain com
modities and derivatives. The exposure is calculated and consolidated
on a daily basis and managed using a sophisticated system of limits.
At a consolidated level, the exposure is expressed by the Value at Risk.
This measure, based on historic market developments, indicates the
maximum loss that Rabobank Group can suffer subject to a certain
confidence level and in 'normal' market conditions. The level of the
Value at Risk reflects market developments and the positions taken by
the bank itself.
In order to understand the maximum potential risk, the effect of certain
extreme events ('event risk') on the value of the portfolios is calcula
ted. To this end, both actual and hypothetical scenarios are analysed.
Sensitivity analyses are also used.
The graph on this page shows the movement in the Value at Risk in
the year under review. In 2004, the Value at Risk fluctuated between
EUR 11 (11) million and EUR 22 (18) million, with an average of EUR 17
(14) million. For 2004, this means that, at a confidence level of 97.5%,
losses on any one day would not have exceeded EUR 22 million.
Value at Risk
in EUR millions
25
20
15
10
The Value at Risk for the trading portfolios is subdivided in a number
of components. The value of the trading portfolios is sensitive mainly
to changes in interest rates, equity prices and credit spreads.
Since opposite positions of different books offset each other to a
certain degree, this results in a diversification benefit which reduces
total risk. On 31 December 2004, the consolidated Value at Risk was
EUR 14.6 million.
in EUR millions
Year-end 2004
Credit spread
10.1
Foreign currency
0.1
Shares 8.1
Interest rate
2.2
Diversification
(6.0)
Total Value at Risk 14.6
in EUR millions
Regions
in Europe
in Africa
in Latin
America
in Asia
Total
In of balance
sheet total
Economic country risk (excl. derivatives)
1,385
262
3,742
4,492
9,881
2.1
Risk mitigating components:
- local currency
13
0
798
868
1,679
- third party coverage of country risk
378
135
1,630
569
2,712
- deduction for transactions with lower risk
787
37
432
569
1,825
net exposure before provisions
207
90
882
2,486
3,665
0.8
In of total loan
loss allowances
Total provisions for economic country risk
2
2
121
61
186
8.9
total assets, plus guarantees issued and unused committed credit facilities
