Annual Accounts and Report as at 30 June 2011 Draft - Mediobanca

minus last year). As is the case with net interest income, here too the mismatch inthe event of a reduction in interest rates has reduced, with a gain of €91.6mcompared with €90m as at 30 June 2010.The sensitivity of CheBanca!’s banking book is equally significant, owing to itscontaining a sizeable portfolio of medium-term securities and its funding having ashorter-term profile, leading to results similar to those shown by Mediobanca (thatis, a negative correlation), despite having much smaller asset levels: a 100 bpsincrease in the interest rate curve generates a loss of €124.3m, compared to a gainof €124.8m in the opposite scenario.HedgingFair value hedgesFair value hedges are used to neutralize exposure to interest rate or creditrisk for particular asset or liability positions, via derivative contracts entered intowith leading counterparties. All structured bond issues are fair-value hedged as tothe interest rate component, while index-linked issues are accounted for as partof the trading book. Fair value hedges are also used in corporate finance forcertain bilateral, fixed-rate transactions and to mitigate price risk on equityinvestments held as available for sale.Cash flow hedgesThese are used chiefly as part of the Compass group’s operations. Thenumerous, generally fixed-rate and relatively small-sized transactions are hedgedby floating-rate deposits for large amounts. The hedge is made in order totransform floating-rate deposits into fixed rate positions by correlating therelevant cash flows. Mediobanca S.p.A. implemented some cash flow hedges offuture transaction flows during the period under review (AFS securities disposalshedged through forward contracts).Counterparty riskThis is measured in terms of expected potential market value, thus doingaway with the need to set arbitrary weightings for each type of fund employed,and identifies a maximum potential exposure to groups of the Bank’scounterparties based on a given confidence level and over a specific time horizon.Towards the end of the financial year an overall review of the powers assigned to– 189