saxo-bank-annual-report-2015

NOTES – RISK MANAGEMENT – SAXO BANK GROUP
(DKK 1,000)
MARKET RISK · continued
The Group operates its trading and investment business using the Group’s online investment trading platforms. The Group has a low appetite for
trading and investment related market risk and continue to execute strategic initiatives to minimise the need for open market risk exposures in the
market making/trading activities. The Group’s market risk appetite including the appetite for investment risks in Group Treasury is defined by limits
set in the Risk Appetite Statements. The Group has low risk appetite for structural market risk exposures to the extent these can be mitigated in a
structured and meaningful way.
The market risk is quantified and monitored against a number of exposure, loss and Value-at-Risk limits.
Exposure and loss limit utilisations are monitored on a continuous basis, while Value-at-Risk limit utilisation is evaluated on an end-of-day basis.
Exposure limits are both set according to the underlying asset class and different risk profiles within a single asset class.
Exposure limits on foreign exchange are segmented into more granular levels based on instrument characteristics such as market availability,
liquidity and volatility. On foreign exchange options limits are also set on the gamma and vega to ensure that the key risk elements (underlying
price sensitivity, and volatility) from options are considered and monitored.
Exposure limits on equities and commodities are set on gross, net and single to capture market movements and concentration risk. The single level
is furthermore broken into tenors to avoid concentration risk in specific time buckets. Loss limits are set on a single day basis, and relative to the
underlying asset class and exposure mandate.
The Value-at-Risk (VaR) is an estimated loss to a portfolio value that potentially could arise over a specific time horizon (holding period) from
an adverse market movement with a specified probability (confidence level). The VaR limit framework used by the Group is based on a 95%
confidence level for a 1 day holding period. The VaR model used is based on Monte Carlo simulations to make full repricing for non-linear
instruments.
VaR is deemed to be a good basis for comparing and monitoring risk across different asset classes. However, the model is based on certain
assumptions that should be noted:
• A 1-day holding period assumes that it is possible to hedge or eliminate market risk exposure within that period. This may not always be the
case for highly illiquid markets
• At a 95% confidence level there is a 5% (1 in 20 days) risk of losses exceeding the estimated loss with no certainty of how much the
exceedance will be
• VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day
• The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios
Trading and investment services 2015 2014
VaR position
Foreign currency risk 812 8,050
Interest rate risk 1,439 1,131
Equity price risk 99 75
Commodity price risk 190 441
Total VaR 1,533 7,906
To supplement VaR a stress testing framework is implemented. Based on the most important risk factors in terms of exposures and VaR contributors,
a number of stress tests have been constructed to determine the Group’s vulnerability to large unexpected changes in these risk factors.
Furthermore, a set of stress tests replicating changes experienced in known historical events are also performed.
The VaR position is dependent on the Group’s exposure (limits) and the conditions in the market place. The VaR positions at 31 December 2015
are in general representative for the VaR development during 2015. Any fluctuations in VaR were mainly due to varying market conditions and
minor changes in exposure limits through 2015.
SAXO BANK · ANNUAL REPORT 2015 · 101