Annual Report - Ahli United Bank

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Annual Report - Ahli United Bank

Notes to theConsolidated Financial Statements (Contd.)33 MARKET RISK (continued)a. Market risk-trading (continued)The table below summarises the risk factor composition of the VaR including the correlative effects intrinsic to the trading book:ForeignexchangeInterestrateEffects ofcorrelationTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’0002009 - 31 December (30) 506 1 4772008 - 31 December 248 162 (1) 409b. Market risk-non-tradingInterest rate riskInterest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments or the futureprofitability of the Group. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets andliabilities and off balance sheet instruments that mature or reprice in a given period. The Group measures and manages interestrate risk by establishing levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gapson assets and liabilities are reviewed on a weekly basis and hedging strategies used to reduce the interest rate gaps to within thelimits established by the Bank’s Board of Directors.The following table demonstrates the sensitivity of the Group’s net interest income to a change in interest rates, with all othervariables held constant. The sensitivity is based on the floating rate financial assets and financial liabilities held at 31 December2009 including the effect of hedging instruments. Equity is not sensitive to changes in interest rates as there are no fixed rateinstruments held in the available-for-sale portfolio.Sensitivity analysis - interest rate risk2009 2008US$ ’000 US$ ’000at 10 bps - increase (+)/decrease (-) +/- 958 664at 25 bps - increase (+)/decrease (-) +/- 2,396 1,661Currency riskCurrency risk is the risk that the functional currency value of a financial instrument will fluctuate due to changes in foreignexchange rates.The risk management process manages the Group’s exposure to fluctuations in foreign exchange rates (currency risk) throughthe asset and liability management process. It is the Group’s policy to reduce its exposure to currency fluctuations to acceptablelevels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currencyposition exposures. Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintainedwithin established limits.Sensitivity analysis - currency riskAll foreign currency exposures with the exception of strategic investments are captured as part of the trading book. The risk of theexposures are subject to quantification via a daily VaR calculation, the results of which are disclosed in note 33 (a).The effect of foreign currency translation on the Group’s strategic investments are reported under the “foreign exchange translationreserve” under the note 21(i).94 AUB Annual Report 2009

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