ANNUAL REPORT 2010

Market Risk
An institution is subject to market risk when the market conditions deteriorate and affect the
liquidity and value of the financial instruments in its investment portfolios or contingent
positions, resulting in a loss for that institution. There are two basic types of market risk: price risk
and liquidity risk.
Each market factor and its effect on the organization’s risk profile is measured daily. To accomplish
this, Mercantil has a technological infrastructure and early warning systems. Treasury employs
this technology to monitor and track market risk. It then produces a series of reports for
Treasury’s risk-taking units and the corresponding management levels.
Mercantil’s analyses use different methodologies to measure market risk: Value at Risk (VaR),
Financial Margin Sensitivity due to interest rate changes (Repricing Gap, Risk Gains), Liquidity
Gap and a series of other effective risk management measures and ratios.
To complement the VaR, simulations are run, adding stress situations based on historic extreme
market conditions to estimate Treasury’s potential loss if market conditions deteriorate.
Market Risk in Trading Activities in 2010
Mercantil’s trading activities were carried out in the Venezuelan fixed-income securities market
denominated in bolivars and in fixed-income securities in emerging markets, the latter made up
of Venezuelan government debt securities.
Trading in the bolivar-denominated fixed-income securities market
Fixed income securities became less volatile in 2010 with maintenance of the debt issue program
in national and foreign currency in the primary market, at Bs 40,938 million (Bs 5,150 million in
Treasury Bills, and Bs 35,788 million in government bonds at a fixed or variable coupon rate
depending on Treasury Bill yield). Therefore the risk of those securities measured in terms of
volatility went from an annual average of 3.91% in 2009 to 1.15% at the close of 2010, with less
activity in the secondary market. The average annual yield of local bonds maturing at 4 years
remained at an annual average of around 15.4% in 2010, versus 14.0% in 2009.
Global trading activity on the bolivar-denominated fixed-income securities market maintained
an average VaR of Bs 153.8 thousand in 2010 (maximum Bs 263.9 thousand and minimum Bs 51.8
thousand) versus an average VaR of Bs 384.2 thousand in 2009 (maximum Bs 1.62 billion and
minimum Bs 54.0 thousand).
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