annual report - Hypo Real Estate Holding AG

Group Accounts
The Group recognizes that variance/covariance VaR has certain inherent limitations. The past may not always
provide a reliable indicator of future market movements and moreover the statistical assumptions employed may
understate the probability of very large market moves. For this reason, additional management tools such as
sensitivity measures and stress testing are used to supplement VaR. Moreover, historical simulation VaR was
introduced in the prior year for trading portfolios to supplement variance/covariance VaR.
Liquidity Risk
Liquidity risk is defined as the risk of being unable to fulfil current or future payment obligations in full on or at the
due date.
The objective of the Group’s liquidity management is to ensure that sufficient funds are available to meet the
Group’s commitments to its customers and counterparties, both in terms of demand for loans and repayment of
liabilities and in terms of satisfying the operational liquidity needs of the Group. The Group is assisted in this task
by the fact that a substantial portion of both its assets and liabilities are long-term and that it maintains a continuing
presence in the European money markets.
The underlying aim is to minimise the liquidity risks for both the Bank and the Group as a whole. It is the task of
liquidity management to control the cash flow of the business in such a manner as to ensure that efficient use of
cash flows is maintained. To this extent, the Group primarily funds its assets through the issuance of covered asset
securities and through money market transactions. Liquidity balance sheets and cash flow forecasts are used to
manage the liquidity of the Group and to control future liquidity risks.
Hedging
The Group’s policy is to hedge (accounting or economic) the following banking book exposures:
interest rate risk – using interest rate swaps
currency exposures – using cross-currency swaps and forward foreign exchange swaps
The following table provides examples of certain activities undertaken by the Group, the related risks associated
with such activities and the types of derivatives used in managing such risks. Such risks may also be managed by
using on-balance sheet instruments as part of an integrated approach to risk management.
Activity Risk Type of Hedge
Fixed rate lending/borrowing Sensitivity to increases/decreases Pay/receive fixed interest
in interest rates rate swaps
Investment in foreign currency Sensitivity to Cross-currency swaps
assets/liabilities strengthening/weakening of Euro Foreign exchange swaps
against other currencies Foreign currency funding
Derivatives which meet the hedging criteria of IAS 39 are accounted for as fair value hedges or cash flow hedges.
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