Market risks

This type of risk arises from changes in market interest rates, exchange rates, and the value of securities and commodities.

Market risk management is defined by the Bank’s Market Risk Management Policy. As one of the key elements of the risk management system, this policy covers the organization of market risk management, including the allocation of powers and responsibilities and the risk management process.

Market risk management at the Bank is carried out in the following areas:

• Continuous monitoring of compliance with market risk limits
• Monitoring of compliance with the Market Risk Management Policy
• Providing opinions on all processes, new products and services covering the Bank’s activities in terms of identifying and managing market risks
• Conducting stress tests and analyzing results
• Selecting and applying methods and models for identifying and assessing market risks
• Providing risk opinions on transactions carried out by the Bank in the financial market
• Monitoring market indicators on a daily basis, including interest rates, securities prices and indices
• Calculating and monitoring market values (MTM) and fair values of financial instruments.

The following risk tools are used for market risk management:

• Value at Risk (VaR) methods
• Stress VaR methods
• Counterparty limit setting
• Country limit setting
• Open currency position limits
• Maturity limits
• Stress tests
• Scenario analyses.

Currency risk management system - The Bank manages currency risk by assessing and analyzing the structure of assets and liabilities in foreign currency, entering into hedging agreements and setting limits on individual transactions related to currency risk.

The following positions are reviewed in currency risk management:

• The Bank’s open currency position by individual currencies;
• The Bank’s aggregate open currency position

The Bank controls its currency position in line with the requirements of the Central Bank of the Republic of Azerbaijan and internal limits by limiting its position.

Interest rate risk management system - The main sources of interest rate risk for the Bank are mismatches between the maturities of assets and liabilities that are sensitive to changes in interest rates. Interest rate risks may arise on both the asset and liability sides. The main tools for managing interest rate risks are as follows:
 - Approach to determining interest rates
- GAP control, meaning the difference between assets and liabilities.

The Bank can implement a flexible interest rate policy, taking internal and external factors into account. External factors mainly include changes in market interest rates for certain types of instruments. Internal factors include the interest rates of the Bank’s assets and liabilities, maturity and the level of GAP.

Hedging with derivative financial instruments

Customers who do not have foreign currency income or are not hedged are required to hedge with options. Options give the right to exchange currency at a predetermined rate in the event of devaluation, but do not create an obligation. This provides protection against risk and flexibility, allowing PASHA Bank to manage its risks in line with specific needs and exposures.

FX Forward instruments are used to create clarity around future currency flows based on an agreement between two parties to exchange one currency for another at a pre-agreed future date, and to protect against depreciation or appreciation at a predetermined rate.

Swaps are used to cover temporary cash shortages in one currency with another currency and to reduce fluctuations in the value of assets or liabilities held in non-core currencies. Providing spot and forward rates simultaneously supports hedging and brings clarity to future cash flows.