DBS BANK CHINA LIMITED NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2009 All amounts expressed in Rmb unless otherwise stated
[English translation for reference only]
53
45 FINANCIAL RISK
MANAGEMENT continued
45.3 Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is separately managed for the
Bank’s trading portfolio and non-trading portfolio.
i Trading market risk
Trading market risk arises from the impact on trading positions of changes in foreign exchange rates and interest rate yields. It also includes the impact from changes in the
correlations and volatilities of the above risk factors.
The Bank manages trading market risk in the course of structuring and packaging products for investors and other clients, as well as to benefit from market opportunities.
The Bank’s market risk framework identifies the types of market risk to be covered, the risk metrics and methodologies to be used to capture such risk and the standards governing the
management of market risk within the Bank including limit setting and independent model validation, monitoring and valuation.
China BAC and China ALCO MRC serve as the executive forum for overseeing various aspects of market risk taking including framework, limit management, policies, processes,
methodologies and systems.
The principal market risk appetite measures for trading market risk are Value-at-Risk ‘VaR’ and stress loss. This VaR is complemented by risk control measures, such as
sensitivities to risk factors, including their volatilities, as well as loss triggers for management action.
The Bank’s trading VaR methodology uses a historical simulation approach to forecast the Bank’s trading market risk. The same methodology is employed to compute stressed VaR
and average tail loss metrics. The Bank computes VaR in Singaporean Dollars ‘SG’ daily. VaR at a 99 confidence level over a one-day holding period, using a 1-year
historical observation period is back-tested against the profit or loss of the trading book in line with policy in order to monitor its predictive power.
Although VaR provides valuable insights, no single risk measure can capture all aspects of trading market risk. To complement the VaR measure, regular stress testing is carried out.
The following table shows the year end, average, highest and lowest daily VaR at a 99 confidence level over a one-day holding period for the trading market risk:
DBS BANK CHINA LIMITED NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2009 All amounts expressed in Rmb unless otherwise stated
[English translation for reference only]
54
45 FINANCIAL RISK
MANAGEMENT continued
45.3 Market risk continued i
