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Annual Report 2010 - Muenchener Hypothekenbank eG

Changes in interest rate risk refers to risk arising from changes in the market value of investments or liabilities that are depen- dent on the level of interest rates, and which will react negatively due to changes in interest rates. it represents the most impor- tant component of market price risks for Münchenerhyp. Market price risks also include (credit) spread risk. Credit Spread is the term used to describe the difference between the yield generated by a risk-less bond and a risky bond. Spread risks take into account the danger that this difference in interest rates can change without an adjustment being made to credit- worthiness. The reasons for altered yield premiums are: vary- ing opinions in the market regarding the creditworthiness of the issuer, the creditworthiness of the issuer actually changes although this change is not yet reflected in the issuer’s credit rating, as well as macro-economic factors that influence credit- worthiness categories. This risk was in the forefront of attention in 2010 due to the erosion of market confidence in the financial standing of certain European countries. The sharply widening spreads seen in some cases, like greece or ireland, also impacted on the valuation of our portfolio of securities. The scope of the Bank’s investments in countries that were more affected by the crisis in the finan- cial markets, or in bonds issued by banks domiciled in these countries is moderate: figures shown under Sovereign States also include claims against non-government debtors, which are additionally secured by direct and immediate guarantees issued by the respective state, in addition to government bonds or other public-sector bonds. We do not believe that our investments are in danger of default. The measures taken by the individual states, as well as protec- tive mechanisms enacted at Eu levels, are sufficient to ensure that the affected liabilities will be repaid. in the case of bank bonds, almost all of these bonds are covered bonds so that in this instance it may also be anticipated that they will mature and be honoured without delay. Among other risks, options involve the following risks: volatil- ity risk (vega; risk that the value of a derivative instrument will change due to increasing or decreasing volatility), time risk (Theta; time risk measures how passage of time impacts on the value of a derivative instrument when part of the value is determined by the remaining time left until a contract expires), Rho risk (risk associated with a change in the value of the option due to a change in a risk-less rate of interest), and gamma risk (risk of a change in the option’s delta due to a change in the price of the underlying security.) The volume of risks assumed is moderate as the Bank generally does not employ options for speculative purposes. option positions are generally entered into on an implied basis due to the debtors’ option rights (for example the right to give legal notice of termination per Art. 489 of the german Civil Code – BgB) and are then hedged. Nonetheless, these risks are attentively monitored in the daily risk report and are limited. Currency risk is the term used for risks arising from changes in the market value of investments or liabilities that are dependent on currency exchange rates, and which will react negatively due to changes in currency exchange rates. Münchenerhyp’s trans- actions outside germany are hedged against currency risks to the greatest extent possible and only margins involved in pay- ment of interest can be unhedged. Stock risks are not relevant for Münchenerhyp as our total investments in this asset class amount to less than € 5 million. sovereiGn states Banks total portugal 95 257 352 italy 122 55 177 ireland 30 60 90 Greece 109 0 109 spain 152 705 857 total 508 1,077 1,585 status: 31.12.10. in million €