BRITISH COLUMBIA HYDRO AND POWER AUTHORITY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2016 AND 2015
regular reporting of exposures.
British Columbia Hydro and Power Authority
The Company’s Risk Management Policy for trading activities defines various limits and controls,
including Value at Risk (VaR) limits, mark-to-market limits, and various transaction specific limits
which are monitored on a daily basis. VaR estimates the pre-tax forward trading loss that could result
from changes in commodity prices, with a specific level of confidence, over a specific time
period. Powerex uses an industry standard Monte Carlo VaR model to determine the potential change
in value of its forward trading portfolio over a 10-day holding period, within a 95 per cent confidence
level, resulting from normal market fluctuations.
VaR as an estimate of price risk has several limitations. The VaR model uses historical information to
determine potential future volatility and correlation, assuming that price movements in the recent past
are indicative of near-future price movements. It cannot forecast unusual events which can lead to
extreme price movements. In addition, it is sometimes difficult to appropriately estimate VaR
associated with illiquid or non-standard products. As a result, Powerex uses additional measures to
supplement the use of VaR to estimate price risk. These include the use of a Historic VaR
methodology, stress tests and notional limits for illiquid or emerging products.
Powerex’s VaR, calculated under this methodology, was approximately $10 million at March 31, 2016
(2015 - $5 million).
Fair Value Hierarchy
The following provides an analysis of financial instruments that are measured subsequent to initial
recognition at fair value, grouped based on the lowest level of input that is significant to that fair value
measurement.
The inputs used in determining fair value are characterized by using a hierarchy that prioritizes inputs
based on the degree to which they are observable. The three levels of the fair value hierarchy are as
follows:
Level 1 - values are quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2 - inputs are those other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly, as of the reporting date.
Level 3 - inputs are those that are not based on observable market data.