41. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market risk (continued) 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 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 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: Bank VaR as at 31.12.2023 RM million 1.1.2023 to 31.12.2023 Average RM million Maximum RM million Minimum RM million Profit rate risk 2.21 2.49 3.88 0.01 Foreign exchange risk 0.16 0.36 0.66 0.16 Overall 2.37 2.85 4.30 0.21 Bank VaR as at 31.12.2022 RM million 1.1.2022 to 31.12.2022 Average RM million Maximum RM million Minimum RM million Profit rate risk 0.004 0.58 1.66 0.004 Foreign exchange risk 0.19 1.58 3.35 0.19 Overall 0.20 2.15 4.49 0.20 In addition to VaR, the Bank has put in place the maximum loss limits, position limits, tenor limits and PV01 limits in monitoring the trading book portfolio. Foreign exchange risk The Bank manages and controls the trading book portfolio’s foreign exchange risk by limiting the net open exposure to individual currencies and on an aggregate basis. The Bank also has in place the sensitivity limit. For the Bankwide (trading book and banking book portfolios) foreign exchange risk, the Bank manage and control by limiting the net open exposure on an aggregate basis. 380 Notes to the Financial Statements for the financial year ended 31 December 2023 Bank Islam Malaysia Berhad ◆ Integrated Annual Report 2023
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