Bank Islam Integrated Annual Report 2020

39. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market risk (continued) (ii) Market risk in the trading book portfolio Market risk in the trading book portfolio is monitored and controlled using Value-at-Risk (“VaR”). It is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates over a specified time horizon and to a given level of confidence. The VaR model used by the Group and the Bank are based on historical simulation which derives plausible future scenarios from past series of recorded market rates and prices. The historical simulation model used by the Group and the Bank incorporates the following features: • • Potential market movements are calculated with reference to data from the past two years; • • Historical market rates and prices are calculated with reference to foreign exchange rates and profit rates; and • • VaR is calculated using a 99 per cent confidence level and for a one-day holding period. A summary of the VaR position of the Bank’s trading book portfolios at the reporting date is as follows: As at 31.12.2020 RM million 1.1.2020 to 31.12.2020 Bank Average RM million Maximum RM million Minimum RM million Profit rate risk 2.76 1.88 3.32 0.01 Foreign exchange risk 0.42 0.47 1.02 0.23 Overall 3.18 2.36 3.89 0.36 As at 31.12.2019 RM million 1.1.2019 to 31.12.2019 Bank Average RM million Maximum RM million Minimum RM million Profit rate risk 0.33 1.07 1.60 0.03 Foreign exchange risk 0.34 0.47 0.94 0.21 Overall 0.67 1.54 2.26 0.30 In addition to VaR, the Group and the Bank has put in place the maximum loss limits, position limits, tenor limits and PV01 limits in monitoring the trading book portfolio. BANK ISLAM MALAYS IA BERHAD INTEGRATED ANNUAL REPORT 2020 289