KB prezent. angl - Komerční banka

100 ➔101
Unconsolidated Financial Statements
under CAS
Products traded by the Bank
The Bank trades the following products that carry an element of market risk: loans and deposits in the interbank market, currency
transactions (spots, swaps, forwards), interest rate instruments (interest rate swaps, FRAs), treasury bills and Government bonds,
corporate bonds and other specific products, such as bills of exchange/bill programs, cash management for selected clients, etc.
The Bank does not conduct any proprietary option transactions, it only enters into back-to-back transactions with options.
The Bank enters into transactions with financial derivative instruments for proprietary purposes as well as on clients’ accounts.
In addition, the Bank uses derivative instruments to hedge positions that expose the Bank to market risk.
In order to hedge its own positions, the Bank primarily uses interest rate swaps, FRAs and currency swaps.
The Bank has also entered into a number of structured financial derivative transactions for its clients which are designed to meet the
clients’ hedging needs. These products are measured using internal models; market risk is eliminated by closing the position through
a back-to-back deal.
Financial derivative instruments are traded only on over-the-counter markets. The Bank trades no stock exchange derivatives.
Market risk in the Market Book
In order to measure market risk inherent in the Market Book, the Bank uses, inter alia, the Value at Risk concept. Value at Risk is
calculated using historical simulations and represents a maximum potential loss on the portfolio over a given time period (typically
one trading day) with a confidence level of 99 percent. The Bank uses analyses of historical scenarios (“back testing”) to validate the
correctness of Value at Risk. The actual results of the trading books are compared with the modelled value of Value at Risk and the
Bank assesses the number of breaches of the confidence level.
The Bank has also implemented daily analyses of shock scenarios (“stress testing”) of all open positions in the Market Book.
The Bank has defined shock scenarios for principal groups of currencies.
The Global Value at Risk over the holding period of one day with a confidence level of 99 percent was EUR (583,570) and
EUR (289,993) as of 31 December 2003 and 2002, respectively. The average Global Value at Risk was EUR (417,072) and EUR (381,579)
for the years ended 31 December 2003 and 2002, respectively. The Value at Risk limits were determined by management of the Bank
for risk management.
Market risk in the Structural Book
The foreign exchange position is monitored on a daily basis in accordance with the CNB Regulation on capital adequacy of banks
including credit and market risk. Within its Structural Book, the Bank manages foreign exchange risk so as to achieve minimum risk
exposures. In order to achieve this, the foreign exchange position of the Structural Book is measured on a daily basis and
subsequently hedged under established rules. For the purpose of hedging foreign exchange positions within the Structural Book, the
Bank uses standard cross-currency instruments in the interbank market, such as cross-currency spots and forwards. Pursuant to
regulatory requirements, the Bank reports, on a monthly basis, on its foreign currency and Czech crown position to the Czech
National Bank.
Interest rate risk within the Structural Book is monitored and measured using a static gap analysis, sensitivity of interest income to
a parallel shift of the yield curve, and Earnings at Risk (“EaR”) for net interest income which is monitored separately for CZK, USD and
EUR, and the sum of other foreign currencies. The EaR indicator shows the maximum departure of the planned net interest income
over a one year period attributable to the movements in interest rates with a 99 percent confidence level from the initial value. EaR is
set using stochastic simulations of random scenarios of interest rate developments and a change in interest income relative to the
initial value is established for each scenario. The calculation of EaR to net interest income involves a stress-testing approach to
interest rate risk within the Structural Book.
In order to hedge interest rate risk within the Structural Book the Bank uses both standard derivative instruments available in the
interbank market (such as FRAs and interest rate swaps) and appropriate investment in securities or selection of interest rate
parameters of other assets and liabilities.