Annual Report 2010 - Muenchener Hypothekenbank eG

Market price risks are controlled by determining the present value of all of Münchenerhyp’s transaction on a daily basis. Transactions whose values are established by discounting cash flows are evaluated by the Bank’s SAP inventory control system. The valuation of structured transactions – mainly interest rate capping, swaptions and termination rights that are lawful and agreed – is carried out in a dedicated system. The backbone of our risk control operations is the delta-vector, which is calcu- lated on a daily basis. This figure is determined by the present value of the change incurred per range of maturities when the mid-swap curve is affected by one basis point. Münchener hypothekenbank uses the value-at-risk figure to identify and limit market risks. Linear as well as non-linear risks are taken into consideration using a delta-gamma approach when cal- culating value at risk. Additional stress scenarios are used here to measure the effect of extreme shifts in risk factors and the effects of other risk categories. The current (daily) stress scenarios are: >> Changes in legal regulatory requirements: The current interest rate curve is completely parallel shifted up by 130 base points and down by 190 base points. The worst result of the two shifts is used for calculation purposes. >> Parallel shifts: The current interest rate curve is completely shifted up and down by 100 base points. The worst result of the two shifts is used for calculation purposes. >> Steepening/flattening: The current interest rate curve is rotated in both directions around the 5-year rate as the fixed point. >> historical simulations: • September 11, 2001 terror attack in New York: Changes seen in market prices between September 10, 2001 and September 24, 2001 – the immediate market reaction to the attack – are played out using the current levels as a base level. • The 2008 crisis in the financial markets: Changes in inter- est rates seen between September 12, 2008 (last banking day before the collapse of Lehman Brothers) and october 10, 2008 are played out using the current levels. The maximum value at Risk (vaR) of the Banks books (interest and currencies) at a confidence level of 99.5 percent at a ten day holding period was € 25 million. The average comparable figure noted in the previous year was about € 12 million. Because Münchenerhyp is a trading book institution (only for futures) we use a special application to control potential risks in this area, also on an intra-day basis. furthermore, these trades are also integrated into our normal reporting. Münchenerhyp controls its credit spread risks by calculating the present value of its asset related capital market transac- tions on a daily basis. Based on the cash flow data generated by the SAP system, the Bank uses its own applications to cal- culate the Credit Spread vaR, the Credit Spread sensitivities and various credit spread stress scenarios. Münchenerhyp uses the value-at-risk (vaR) figure to identify and limit credit spread risks. The vaR figure is calculated based on historical simulation. The current (daily) credit spread stress scenarios are: >> Parallel shifts: All credit spreads are shifted up and down by 100 base points. The worst result of the two shifts is used for calculation purposes. >> historical simulation of the collapse of Lehman Brothers: the scenario assumes an immediate change in the spread based on the changes that occurred one working day before the collapse of the investment bank until four weeks after this date. >> Worst Case Scenario: The maximum widening of spreads for all classes of securities in the Bank’s portfolio since Jan- uary 2, 2007 is calculated. The average value of these cal- culations is used as the parallel shift to the respective class of security. >> flight into government bonds: The scenario simulates a sig- nificantly visible aversion to risk that was previously seen in the markets. Spreads for riskier classes of paper widen while spreads for safer government bonds narrow. 42 | 43 münchener hypothekenbank eg | annUaL report 2010 management report