UBI Banca Group

Level 2
Where no prices are available on active markets, the fair value of instruments is measured by
using measurement models which make use of market inputs. The resulting measurement is
therefore based on factors inferred from official quotations, essentially similar in terms of risk
factors, by applying a determined method of calculation.
With regard to derivatives, almost all the trading instruments consist of over the counter
derivatives and they are therefore measured using internal models that use market inputs.
The options implicit in structured bonds and in the respective hedging derivatives are
measured using appropriate pricing models which make use of directly observable market
inputs (e.g. interest rate curves, volatility matrices and correlations, exchange rates). The
calculation methodologies used replicate the prices of financial instruments listed on active
markets without making discretionary assumptions which might influence the final price.
As concerns equity instruments recognised within the available-for-sale portfolio, these are
classified as within level two if they are measured on the basis of measurement methods which
consider transactions occurring in the instrument in a reasonable period of time with respect
to the date of measurement and in some cases, by means of stock market multiples for
comparable companies.
Finally the “plain vanilla” bonds in issue and the “plain vanilla” component of structured
bonds are valued by discounting future cash flows to present values. The curve used for
subordinated issues is obtained by applying the UBI subordinated spread observed for
transactions with a duration equal to the residual life of the bond to the risk free curve. The
curve used for senior issues destined for institutional customers is the UBI EMTN curve.
Finally the curve used to determine the fair value of issues subscribed by ordinary customers
is obtained by applying the spreads observed in the last quarter for issues with a maturity
equal to the residual life of individual bonds to the risk free curve.
Level 3
Level three is defined as the fair value determined using measurement models which use
inputs that are not directly observable on markets and which involve the use of estimates and
assumptions by management.
Complex OTC derivatives are measured using internal models that use implicit assumptions;
the credit risk component is also considered explicitly for these.
The remaining part of the equity instruments classified as available-for-sale are measured
using methods based on an analysis of the fundamentals of the company in question and, as
an alternative of last resort, at cost.
It is necessary to use valuation models to measure the level three fair value of options with
underlying equity instruments that involve the use of market inputs that are not directly
observable and which involve the use of estimates and assumptions in the measurement. More
specifically the measurement instruments are designed using appropriate calculation methods
based on specific assumptions that regard:
• the performance of future cash flows, affected by future events to which probabilities are
assigned based on historical experience or on behavioural assumptions;
• determined input parameters not observable on active markets which are estimated from
financial instruments observable on the market but not identical to the instruments
measured.
Finally, with regard to bonds issued, these are recognised within level 3 and measured at cost
if this correlates directly with the financing operation.
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