Untitled - Banco Mercantil

Market Risk
Market risk appears in an institution when it registers losses due to adverse changes in market
conditions which affect its liquidity and the market value of its portfolio investments and off
balance positions.) Mercantil Banco Universal is susceptible to two main types of risk: Price
and Liquidity.
The maximum level of risk that the risk-taking units can take in each of their activities are
determined on the basis of the benefits expected to be obtained from each Treasury activity
and the evolution envisaged for each market factor. These limits are approved by the Global
Risk Committee and this process seeks to strike a balance between the level of risk taken and
the profit expected from each business.
Each market factor and its effect on the risk profile approved by senior management is
evaluated daily using the technological infrastructure and early warning systems available to
Mercantil. Depending on the results of these evaluations and the level of market risk assumed
by the Treasury, a range of reports is sent to the risk-taking units and the appropriate
management levels. The methodologies used to measure market risk are Value at Risk,
Financial Margin Sensitivity to changes in interest rate repricing gaps, risk gains, liquidity
gaps and various other measures and ratios for detecting market risk under normal and stress
conditions.
The Market Risk unit is responsible for creating and certifying models to measure risks. The
parameters that support them are reviewed periodically and compared with backtesting studies.
Market Risk in Fixed-Income bolivar-denominated trading in 2007
In 2007 interest rates in the Venezuelan financial market increased following the reduction of
surplus liquidity levels triggered by the Central Bank’s decisions on monetary policy. This
reflected an increase in the daily volatility of the price of bolivar-denominated securities from
0.31% in 2006 to approximately 1.51%. For example, Vebonos maturing in April 2010 yielded
13.43% in 2007, compared to 3.48% at the close of 2006.
Trading in the Fixed Income bolivar-denominated Securities Market
Trading activities carried out by Mercantil Banco Universal were addressed at the Venezuelan
fixed-income bolivar-denominated securities market, mainly its domestic public debit.
Mercantil Banco Universal maintained its leadership, participating actively in the Venezuelan
sovereign debt market during 2007 through bolivar and dollar-denominated national public
debt bond issuances as well as global bonds.
M e r c a n t i l B a n c o U n i v e r s a l
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