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

HedgingFair value hedgesFair value hedges are used to neutralize exposure to interest rate orcredit risk for particular asset or liability positions, via derivative contractsentered into with leading counterparties. All structured bond issues arefair-value hedged as to the interest rate component, while index-linkedissues are accounted for as part of the trading book. Fair value hedges arealso used in corporate finance for certain bilateral, fixed-rate transactionsand to mitigate price risk on equity investments held as available for sale.Cash flow hedgesThese are used chiefly as part of the Compass group’s operations.The numerous, generally fixed-rate and relatively small-sized transactionsare hedged by floating-rate deposits for large amounts. The hedge is madein order to transform floating-rate deposits into fixed rate positions bycorrelating the relevant cash flows. Mediobanca S.p.A. implemented somecash flow hedges of future transaction flows during the period under review(AFS securities disposals hedged through forward contracts).Counterparty riskThis is measured in terms of expected potential market value, thusdoing away with the need to set arbitrary weightings for each type of fundemployed, and identifies a maximum potential exposure to groups of theBank’s counterparties based on a given confidence level and over aspecific time horizon. Towards the end of the financial year an overallreview of the powers assigned to the Bank’s various bodies was approved,with limits in terms of exposures being divided into three areas based onthe product traded: 1) money market, which includes deals made on theinterbank market and short-term financing in general; 2) repos andsecurities lending, including loans guaranteed by both bonds and equities;and 3) derivatives, which includes all exposures deriving from derivativecontracts net of any collateral.392 –