42. FINANCIAL RISK MANAGEMENT (CONTINUED) Overview (continued) (c) Market risk Overview Market risk is the risk of adverse impact to the Group’s and the Bank’s arises from fluctuations of market prices and rates. The following are the main market risk factors that the Group and the Bank are exposed to: • Profit Rate Risk: also known as the Rate of Return Risk, is the potential impact on the Group’s and the Bank’s profitability caused by changes in the rate of return due to general market movements or issuer/customer specific reasons; • Foreign Exchange Risk: the impact of exchange rate movements on the Group’s and the Bank’s foreign currency positions; and • Equity Risk: the profitability impact on the Group’s and the Bank’s equity positions or investments caused by changes in equity prices or values. The Group and the Bank separates the market risk exposures into either trading book or banking book portfolios. Trading book portfolios include those positions arising from market making, proprietary position taking and other marked-to-market positions as per the Board-approved Trading Book Policy Statements. Banking book portfolios primarily arise from the Group’s and the Bank’s profit rate management of the Bank’s assets and liabilities and investment portfolio mainly for liquidity management. Market risk governance The management of market risk is principally carried out by using sets of policies and guidelines approved by the ALCO and/or BRC, guided by the Board-approved Risk Appetite Statement. The ALCO is responsible under the authority delegated by the BRC for managing market risk at strategic a level. Management of market risk The objective is to manage market risk exposures in order to optimise return on risk while maintaining a market risk profile consistent with the Group’s and the Bank’s approved risk appetite. The market risk exposures and limits are reported to the ALCO and the BRC. Stress test results are produced regularly to determine the impact of changes in profit rates, foreign exchange rates and other risk factors on the Group’s and the Bank’s profitability, capital adequacy and liquidity under various scenarios. 393 w w w . b a n k i s l a m. c o m 01 02 03 04 05 06 07 08 FINANCIAL STATEMENTS 09
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