contents - BNP Paribas

76
SEVENTY-
SIX
MARKET RISK
BNP measures its market risks in
terms of RNP, which is defined as
sensitivity (of a position, portfolio,
book, etc.) to very large assumed
innovations in market prices. BNP’s
current in-house RNP model uses
five years of underlying data to
estimate the impact of these adverse
market fluctuations on the Group’s
interest rate, foreign exchange, and
equity positions over a five-day
holding period, assuming a 95%
confidence level. It also examines
the underlying data of the previous
12 months to determine whether
volatility, measured according to
the same criteria, has not varied in
even greater proportions.
Since adverse market price
changes are very large, they relate
to the one or two most extreme
fluctuations in very broad risk
factors (e.g., short- and long-term
interest rates; euro-zone
currencies, other freely floating
currencies, and centrally
administered currencies), which
apply to each class of risk.
RNP limits for interest rate,
foreign exchange, and equity
positions and for each currency
are applied to each book and
trader at each decision-making
center. Each site is also given
volume position limits, which
are easier to monitor on a daily
basis. Additional rules for
The BNP Group has the following notional risk exposure:
second-order risks (such as
decorrelation between two
similar but not identical
instruments) round out the limit
framework. BNP uses a scenario
based method to perform specific
checks on options due to the
complexity of the non-linear risks
they present. For reasons of
conservatism, all authorizations
for market risk limits, qualified as
a maximum RNP, imposed by
BNP’s authorized representatives
based on a proposal by the
Market Risk Committee, and
presented to the Board of
Directors, are currently spread
over the various books without
taking any offsetting correlations
into account.
Millions of French francs, 1997 1996
at 31 December BNP Including BNP Including
BNP BNP
Group France Group France
Interest-rate risk exposure:
On French franc and foreign currency
money market instruments and bonds .. 119 .. 84
On derivatives .. 779 .. 543
Total interest-rate risk exposure 1,735 898 1,417 626
Currency risk exposure:
On foreign exchange forward instruments .. 18 .. 2
On foreign exchange options .. 24 .. 32
Total currency risk exposure 66 42 45 34
Stock price risk exposure 485 76 429 67
R E P O R T O F T H E