Page 300 - Bank-Muamalat-AR2020

298 BANK MUAMALAT MALAYSIA BERHAD About Us Our Leadership Our Strategy
ANNUAL REPORT FY2020

Notes to the fiNaNcial statemeNts
31 December 2020 (16 JamaDil awal 1442h)

46. FINANCIAL rISk MANAGEMENT OBJECTIvES AND POLICIES (CONT’D.)
(b) Market risk
Market risk refer to the potential loss arising from adverse movements in market variables such as rate of return, foreign
exchange rate, equity prices and commodity prices.
Types of market risk

(i) Traded market risk
Traded market risk, primarily rate of return risk and credit spread risk, exists in the Group’s and the Bank’s trading
positions held for the purpose of benefiting from short-term price movements, which are conducted primarily by
the treasury operations.

risk measurement approach
The Group’s and the Bank’s traded market risk framework comprises market risk policies and practices, delegation
of authority, market risk limits and valuation methodologies. The Group’s and the Bank’s traded market risk for
its profit-sensitive fixed income instruments is measured by the present value of a one basis point change (“PV01”)
and is monitored independently by the Treasury Middle Office (“TMO”) on a daily basis against approved market
risk limits. In addition, the TMO is also responsible to monitor and report on limit excesses and the daily mark-to-
market valuation of fixed income securities. The market risk limits are determined after taking into account the risk
appetite and the risk-return relationship and are periodically reviewed by Risk Management Department. Changes
to market risk limits must be approved by the Board of Directors. The trading positions and limits are regularly
reported to the ALCO. The Group and the Bank maintain its policy of prohibiting exposures in trading financial
derivative positions unless with the prior specific approval of the Board of Directors.

(ii) Non-traded market risk
The Group’s and the Bank’s core non-traded market risk refers to the rate of return risk in the Group’s and the
Bank’s Islamic banking business, foreign exchange risk, and equity risk.

rate of return risk
Rate of return risk refers to the potential loss of income arising from changes in market rates in regards to return on
assets and on the returns payable on funding. The risk arises from option portfolios embedded in the Group’s and
the Bank’s assets and liabilities.

Rate of return risk emanates from the repricing mismatches of the Group’s and the Bank’s banking assets and
liabilities and also from the Group’s and the Bank’s investment of its surplus funds.

risk measurement approach
The primary objective in managing the rate of return risk is to manage the volatility in the Group’s and the Bank’s
net profit income (“NPI”) and economic value of equity (“EVE”), whilst balancing the cost of such hedging activities
on the current revenue streams. This shall be achieved in a variety of ways that involve the offsetting of positions
against each other for any matching assets and liabilities, the acquisition of new financial assets and liabilities to
narrow the mismatch in profit rate sensitive assets and liabilities, and entering into derivative financial instruments
which have the opposite effects.
The Group and the Bank use various tools including repricing gap reports, sensitivity analysis, and income scenario
simulations to measure its rate of return risk. The impact on earnings and EVE is considered at all times in measuring
the rate of return risk and is subject to limits approved by the Board of Directors.

The following tables indicate the effective profit rates at the reporting date and the Group’s and the Bank’s sensitivity
to profit rates by time band based on the earlier of contractual repricing date and maturity date. Actual repricing
dates may differ from contractual repricing dates due to advance payment of financing or early withdrawal of
deposits.