Page 259 - ACCESS BANK ANNUAL REPORTS_eBook

Market risk management

The Group trades on bonds, treasury bills and foreign currency. Market risk in trading portfolios is monitored and con-
trolled using tools such as position limits, value at risk and present value of an assumed basis points change in yields or
exchange rates coupled with concentration limits. The major measurement technique used to measure and control
market risk is outlined below.

5.2.2 value at risk (var)

The Group applies a ‘value at risk’ (VaR) methodology to its trading portfolios at a group level to estimate the market risk
of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market
conditions. The Board sets limits on the value of risk that may be accepted for the Group, which are monitored on a daily
basis by Market Risk Unit. Interest rate risk in the non-trading book is measured through the use of interest rate repricing
gap analysis (Note 5.2.1).

VaR is a statistically based estimate of the potential loss on the current portfolio from adverse market movements. It
expresses the ‘maximum’ amount the Group might lose, but only to a certain level of confidence (99%). There is therefore
a specified statistical probability (1%) that actual loss could be greater than the VaR estimate. Value-at-risk estimates the
potential maximum decline in the value of a position or portfolio, under normal market conditions, over a one-day holding
year. It also assumes that market moves occurring over this holding year will follow a similar pattern. The Group applies
these historical changes in rates, prices, etc. directly to its current positions - a method known as historical simulation.
Actual outcomes are monitored regularly to test the validity of the assumptions and parameters/ factors used in the VaR
calculation.

The Access Bank value-at-risk method incorporates the factor sensitivities of the trading portfolio, the volatilities and
correlations of the market risk factors. The group uses the variance covariance method which derives likely future changes
in market value from historical market volatility. Value at risks is estimated on the basis of exposures outstanding at the
close of business and therefore might not factor in the intra-day exposures. However, the bank does not only base its risk
estimates on Value at Risk, it uses Stress tests to provide an indication of the potential size of losses that could arise in
extreme conditions by applying a what-if analysis to further complement it. The results of the stress tests are reviewed by
senior management in each business unit and by the Board of Directors.

The trading book is made up of foreign currency, Bonds and Treasury bills instruments. The value at Risk of the trading
book is as stated:

group var by risk type December 2017
In thousands of Naira Average High Low Actual

Foreign exchange risk 678,320 2,352,213 17,806 652,213
Interest rate risk 434,481 1,379,604 190,525 309,754
Total 1,112,801 3,731,817 208,331 961,967

Group December 2016
Average High Low Actual

Foreign exchange risk 20,455 201,816 154 12,050
Interest rate risk 564,918 1,492,932 84,051 393,917
Total 585,373 1,694,748 84,205 405,967

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Annual Report & Accounts 2017