UBI Banca Group

2.3 Currency risk
Qualitative information
A. General aspects, management processes and methods of measuring currency risk
Currency risk is calculated on the basis of mismatches existing between assets and liabilities in
foreign currency (spot and forward), relating to each currency other than the euro. The main sources
of risk are as follows:
lending and funding in foreign currency with corporate and retail customers;
holding financial instruments denominated in foreign currency;
holding units in O.I.C.R. (collective investment instruments) for which, even if they are
denominated in euro, it is not possible to determine the composition in foreign currency of the
underlying investments and/or for which the maximum limit on investment in foreign
currency is not known and binding;
dealing in foreign bank notes.
Foreign currency risk in the UBI Group regards banking book exposures originated by the network
banks and/or by the product companies – resulting from their commercial activities – and their
positions relating to trading in foreign currency.
Trading on foreign exchange markets is performed by the Group treasury function which operates by
using instruments such as forward trades, forex swaps, domestic currency swaps and currency
options, thereby optimising risks resulting from Group positions in foreign currency.
Exposure to currency risk is calculated starting from the net foreign currency position using a
method based on supervisory regulations. Equity investments and tangible assets are not included in
the calculation of the net foreign currency position.
B. Currency risk hedging
Foreign currency risk arising from exposures in the banking book is mitigated by systematically
hedging them with funding and lending transactions in the same currency as the original
transaction. This activity to contain risk is also performed by the product companies for their own
banking book positions. The remaining exposures and trading portfolio exposures are fully and
precisely hedged with spot forex positions.
For some network banks in the Group (Banca Popolare di Bergamo S.p.A. and Banca Popolare di
Ancona S.p.A), issues of certificates of deposit in foreign Japanese currency (JPY) are hedged by
simultaneously entering into DCS contracts with customers, as already mentioned in the sub-section
on interest rate risk. The accounting treatment employed for these transactions is that for cash flow
hedging.
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