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

Section 2Market risk2.1 INTEREST RATE RISK - TRADING BOOKQUALITATIVE INFORMATIONMediobanca controls market risk on a daily basis by measuring sensitivity tomovements in the interest rate curve; and calculating value at risk (VaR). 1 VaR ismeasured not only for the trading book but is extended to cover the Bank’s entireasset structure, i.e. banking as well as trading book, net of the strategicinvestments, to ensure that AFS positions are monitored as well, for whichchanges in market value, while not impacting on the profit and loss account,bring about changes in net equity.The authorization structure governing Mediobanca’s operations is based onvalue at risk readings for the various organizational units. VaR is calculatedbased on expected volatility and the correlation between risk factors concerned,assuming a disposal period of a single trading day and based on a 99%confidence level. As from this financial year the parametric method has beenabandoned, and values have been calculated exclusively using the Monte Carlomethod 2 . This is complemented by a VaR figure based on historical simulation,also used to calculate the expected shortfall, which measures average loss in 1%of the most unfavourable scenarios. All measurements are made using thefollowing as risk factors: exchange rates, share prices (at level of individual stocklevel), volatility surfaces, inflation curves and interest rates, with mapping on thedifferent maturities, and for interest rates the general market component is alsoseparated from issuer-specific risk.In addition to these indicators, stress tests are also carried out weekly on themain risk factors, to show the impact which historical crisis scenarios beingrepeated and significant movements in the main market data could have. Theseinclude the shock induced by the terrorist attacks on September 11, 2001, thebankruptcy of Lehman Brothers and the recent Greek crisis.1VaR: maximum potential loss over a specified time horizon and a given confidence level.2The portfolio values are calculated based on the assumption that returns on the elementary risk factors, theperformance of which is simulated using a volatility matrix and correlations updated daily, will bedistributed normally; this allows non-linear positions to be calibrated to risk factors more fully.382 –