Annual Report - EDP

notes to the EDP consolidated - Energias de Portugal, and company S.A. financial statementsNotes to for the the Consolidated years ended and Company 31 december Financial Statements 2012 and 2011for the years ended 31 December 2012 and 2011Monitoring the price, volume and credit risks includes their quantification in terms of positions at risk which can be adjusted through market operations. Thisquantification is made by using specific models that value positions so as to determine the maximum loss that can be incurred, with a given probability and adetermined time frame.Risks are managed in accordance with the strategies defined by the Executive Board of Directors, which are subject to a periodic review based on the evolution of theoperations, in order to change the profile of the positions and adjust them to the established management objectives.Risks are monitored by means of a series of actions involving daily monitoring of the different risk indicators, of the operations grouped in the systems and theprudence limits defined by management area and risk component, as well as regular backtesting and supplementary validation of the models and assumptionsused. This monitoring not only ensures the effectiveness of the strategies implemented, but also provides elements to enable initiatives to be taken to correct them, ifnecessary.The principal price and volume risk indicator used is the margin at risk (P@R), which estimates the impact of the variation of the different risk factors (price of electricityand hydrological) on the following year’s margin, P@R corresponding to the difference between an expected margin and a pessimistic scenario with a probability tooccur of 5% (confidence interval of 95%) considering a time frame of 1 year. Both the volumes which are certain and those, which although uncertain, are expected,namely production of the plants and the corresponding consumption of fuel, are considered.P@R Distributionby risk factorThousands of Euros Dec 2012 Dec 2011Risk factor:Negociation - 2,000Fuel 26,000 45,000CO2 2,000 1,000Electricity 18,000 19,000Hydrological 38,000 19,000Diversification effect -43,000 -66,000Total 41,000 20,000Regarding credit risk, the quantification of exposure considers the amount and type of transaction (e.g. swap or forward), the rating of the counterparty risk thatdepends on the probability of default and the expected value of credit to recover, which varies depending on the guarantees received or the existence of "netting"agreements. As at 31 December 2012 and 2011 the EDP Group's exposure to credit risk rating is as follows:Dec 2012 Dec 2011Credit risk rating (S&P):AAA to AA- 6.63% 12.44%A+ to A- 56.54% 81.15%BBB+ to BBB- 33.55% 3.43%BB+ to B- 0.59% 0.47%No rating assigned 2.69% 2.51%Total 100.00% 100.00%Brazil – Interest rate and exchange rate risk managementThe main tool used to monitor and control market risk in the brazilian subsidiaries is Value at Risk (VaR).VaR is the maximum expected loss on the operations portfolio over a specific period of time, resulting from an adverse movement in the market that has a specificconfidence interval. The VaR model used is based on a confidence interval of 95% and assumes a 10 day time frame for settlement of positions, based essentially onhistorical data. Considering market data for the last 2 years and observation of the relationship between the different prices and markets, the model generates aseries of scenarios for changes in market prices.The VaR methodology used in Brazil considers a series of stress tests with the objective of monitoring the financial impact of the different market scenarios.The summary of VaR on the operations of the Brazilian subsidiaries at 31 December 2012 and 2011 is as follows:Thousands of Euros Dec 2012 Dec 2011Exchange rate risk 1,309 677Interest rate risk 4,097 3,747Covariation -1,993 -604Total 3,413 3,820VaREDP - Annual Report 2012193