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(a)
Trading portfolio
COFIDE, in relation to market risk, is exposed to interest rate risk, exchange risk and price risk,
affecting the value of assets and positions of the trading portfolio. As of December 31, 2015 and
2014, COFIDE does not have any balance due to exposure of the trading portfolio.
COFIDE applies VaR (Value at Risk) as a basic statistic indicator to measure, manage and
control market risks, given that it estimates maximum losses expected in the positions of the
trading portfolio, for a time horizon of 10 days and a 99% trust level, under normal market
conditions. The calculation of VaR is analyzed per risk factor; interest rate and exchange risk,
mainly.
In order to estimate value at risk of interest rate, the concept of “Duration” is used as sensitivity
measure of the portfolio of investments and derivatives of COFIDE. In case of value at risk for
exchange rate, level of exposure per currency is calculated by adding the present value of
estimated investments and derivatives. Regarding value at risk of prices, the market value of
each investment effective at the assessment date is estimated. Once risk factors have been
determined for interest and exchange rates, sensitivity of factors of specific risks and target
variables is estimated. Subsequently, VaR for interest rates in foreign currency, VaR for
exchange rate risk, VaR for price risk and VaR for aggregate market risk are determined.
Additionally, stress tests are monthly performed, as well as model validating tests (Back
testing).
(b)
Non-trading assets and liabilities
In the case of non-trading assets and liabilities, COFIDE is exposed to the following variations:
i) interest rate and ii) exchange rate.
(i)
Interest rate risk
Interest rate risk is produced by the possibility that changes in market interest rate
negatively affect the financial condition of an entity, affecting its earnings and equity
value.
COFIDE has established within its internal methodologies the differentiation between the
effect of interest rate risk on profit (earnings), related with interests to be received and
payable (re-price, re-investment or re-financing); and the effect on economic value (equity
value), related with the current value of assets and liabilities of the company and interest
rates to which future flows that these generate update.
That is to say, impact of changes in interest rates is presented in two ways: the first one, in
an impact on expected profit, related directly with risk of investment, financing and
pricing. The second one is related with valuation of assets and liabilities of the entity and,
therefore, with economical or real value of its equity.
Impact on expected profit is determined by profit at risk corresponding to the expected
variation in the financial margin of COFIDE, before expected changes in interest rates.
That is to say, impact over earnings of the entity. Impact over equity is determined by
equity value at risk corresponding to the variation of equity value before changes in
interest rates use for its valuation. That is to say, impact on changes in market interest rates
over the statement of financial position.