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Chapter
39 /
Financial Instruments: Disclosures, (lFRS 7)
455
4.2.3 Market Risk
4.2.3.1 IFRS 7 defines "market risk" as the risk that the fair value or future cash flows of a finan–
cial instrument will fluctuate because of changes in market prices. Market risk comprises three
types of risk: currency risk , interest rate risk, and other price risk .
4.2.3.2 IFRS 7 requires an entity to disclose a sensitivity analysis to market risk. Sensitivity
analyses help users of financial statements evaluate what are reasonably possible changes in the
entity's financial pos ition and financial performance due to changes in market risk factors .
4.2.3.3 Unless the entity uses a sensitivity analysis that reflects interdependencies between risk
variables to manage financial risks, the sensitivity analysis should be broken down by type of mar–
ket risk to which the entity is exposed at the reporting date, showing how profit or loss and equity
would have been affected by changes in the relevant risk variable that were reasonably possible at
that date . The entity is also required to disclose the methods and assumptions used in preparing the
sensitivity analysis. When the sensitivity analyses disclosed are unrepresentative (e.g. , because the
year-end exposure does not reflect the exposure during the year) , the entity shall disclose that fact
and the reason it believes the sensitivity analyses are unrepresentative.
Practical Insight
In managing financial risks (in particular market risks), banks and securities firms often use
value at risk (VAR) as a measure of risk. VAR is a statistical measure of downside risk that
reflects interdependencies between risk variables. The VAR of a portfolio of financial
instruments is the maximum loss that the portfolio is expected to suffer over a specified holding
period horizon (such as one or ten days) with a given level of confidence (such as 95% or
99%). For example, if the I-day VAR of an entity' s trading portfolio is $10,000,000 at the
99% confidence level, this suggests that the entity will lose more than $10,000,000 in only one
out of 100 days.
5. EXCERPTS FROM FINANCIAL STATEMENTS
5.1 DEUTSCHE TELEKOM, Annual Report 2006
(43) Risk Management and Financial Derivatives
Principles of risk management
Deutsche Telekom is exposed in particular to risks from movements in exchange rates, interest
rates, and market prices that affect its assets, liabilities, and forecast transactions. Financial risk man–
agement aims to limit these market risks through ongoing operational and finance activities. Selected
derivative and nonderivative hedging instruments are used for this purpose, depending on the risk as–
sessment. However, Deutsche Telekom only hedges the risks that affect the Group's cash flow. De–
rivatives are exclusively used as hedging instruments (i.e., not for trading or other speculative purposes).
To reduce the credit risk, hedging transactions are generally only concluded with leading financial insti–
tutions whose credit rating is at least BBB+/Baai. In addition, the credit risk of financial instruments
with a positive fair value is minimized by way of limit management, which sets individualized relative
and absolute figures for risk exposure depending on the counterparty's rating.
The fundamentals of Deutsche Telekom's financial policy are established each year by the Board of
Management and overseen by the Supervisory Board. Group Treasury is responsible for implementing
the finance policy and for ongoing risk management. Certain transactions require the prior approval of
the Board of Management, which is also regularly briefed on the extent and the amount of the current
risk exposure.
Treasury regards effective management of the market risk as one of its main tasks. The department
performs simulation calculations using different worst-case and market scenarios so that it can estimate
the effects of different conditions on the market.
Currency Risks
Deutsche Telekom is exposed to currency risks from its investing, financing, and operating activi–
ties. Risks from foreign currencies are hedged to the extent that they influence the Group's cash flows.
Foreign-currency risks that do not influence the Group' s cash flows (i.e., the risks resulting from the