ANNUAL REPORT 2010

Trading in fixed-income securities in emerging markets
As far as the sovereign debt in foreign currency is concerned, Venezuela issued US$ 3 billion in
government bonds maturing in 2022, while PDVSA issued US$ 3 billion in amortizable bonds
maturing in 2017. During 2010 the price of Venezuelan crude was less volatile than in 2009 (3.42%
versus 5.52% in 2009), with an average price of US$ 71.63/bbl and a historic maximum of
US$ 84.83/bbl in December. The greatest oil price stability translated into less volatility for bond
yields in Venezuela, with an average bond yield of 13.74% in 2010 versus 14.40% in 2009. The
country risk rating remains Stable according to rating agencies Moody’s, Standard & Poor’s and
Fitch, which helped to push prices up.
Average VaR for this activity was US$ 1.04 billion in 2010 (maximum US$ 9,077.8 thousand,
minimum US$ 2.5 thousand), versus US$ 120.0 thousand in 2009, with a maximum of US$ 2,111.1
thousand and a minimum of US$ 0.6 thousand. This significant increase can largely be explained
by the auctions of US$ 6 billion worth of bonds as mentioned above.
Market Risk in Positioning Activities in 2010
The average VaR of Mercantil’s positioning activities (98% confidence), in aggregate terms, for
the consolidated investment portfolio classified as available for sale was Bs 79,453 thousand
(US$ 18.5 million) in 2010, compared with Bs 47,064.7 thousand (US$ 21.9 million) in 2009 . The
reason for the increase in average VaR is that the VaR of fixed income positions in bolivars
quadrupled as a result of Venezuelan public debt issues in local currency, while the valuation of
the US$ positions was affected by the devaluation of the exchange rate from Bs/US$ 2.15 in 2009
to Bs/US$ 4.30 in 2010. In 2010 VaR accounted for 0.8% of the total position in securities
maintained on the balance sheet as available for sale, while this ratio reached 0.5% in 2009.
Price Risk Positions of Interest Rate Mismatch
The price risk involved in the mismatches between interest rates is caused by the assets and
liabilities duration gap. When adverse changes occur in the interest rate market this gap can
impact the institution’s financial margin. To manage this risk, Mercantil quantifies the assets
and liabilities duration gap to take reflect the sensitivity of the financial margin to changes
in interest rates over a 12 month period (in the Venezuelan market 100, 200, 300, 500 and
1000 basis points are used; while in the US market it is calculated using 100 and 200 basis
points), and then measures and compares them against the interest rate limits designed. The
sensitivity of the financial margin to changes interest rates caused by their historic volatility,
the economic value of the capital and an analysis of the duration are also quantified.
Liquidity Risk
Liquidity risk depends on the likelihood that a company will be unable to deliver funds or
financial assets, as agreed with a client or financial market counterpart, at any time or in any
place or currency. This risk is one of the major ones a financial institution could face in its
intermediation activity because it can trigger a host of different risks, one of the worst being
reputational (or franchise) risk. For Mercantil Servicios Financieros and its subsidiaries,
managing and measuring liquidity risk is considered a priority within the organization’s global
risk and business management.
Mercantil Servicios Financieros
69