Bank of baroda

BANK OF BARODA
The benefit of utilizing the dynamic analysis is that it helps to ensure that we adequately capture all potential risks we
face that might not be adequately addressed through static measurement techniques or “simplistic” scenario analyses.
Limiting Market Risk Exposure from Foreign Exchange Operations
Once we have carried out both static analysis and dynamic analysis, we will are able to set parameters and limits that
are designed to prevent our foreign exchange operations from breaching predetermined market risk exposures.
In the case of a VaR analysis, setting VaR limits for different sections of our foreign exchange operations helps ensure
that we are not exposed to risks that are not in accordance with our risk-return profile. We will periodically revise these
limits on the basis of the results of back testing and any modifications of assumptions used for the purpose of conducting
the VaR analysis.
We intend to compute VaR foreign exchange risks for a period of six-nine months with periodic back-testing on a
quarterly basis, following which the relevant VaR limits will be determined. The level of VaR undertaken is monitored and
reported to the Board on a periodic basis. Once the concept and quantification of VaR analysis is better understood, we
proceed to set specific VaR limits on a position and portfolio basis for each particular investment involved.
In addition to VaR limits, we also intend to mandate various static limits that will effectively monitor market risk exposures
as a result of our foreign exchange operations including:
position limits based on underlying exposure;
daylight limits which mitigate the risk arising out of large overbought or oversold positions in currencies during
intraday trading;
overnight limits which mitigates the risk arising out of overnight volatility in foreign exchange rates;
stop loss limits which help limit the loss on positions to a certain pre-defined level that has been approved by the
Board; and
take profit limits which ensure that profits on trading are crystallized and not eroded by keeping the positions for an
unduly long time.
In relation to the dynamic scenario analysis, once we have reviewed the results from the stress testing of various
pessimistic and worst-case scenarios, we believe our management will be better equipped and informed to provide
direction in relation to our foreign exchange market risk exposure.
Implementing Foreign Exchange Risk Management Policies
The effectiveness of our foreign exchange risk management polices lies in their implementation. The Board has established
the authority of specific staff members or committees to make risk management decisions and have set levels of significance
at which decisions may only be made with senior management approval. All aspects of risk management, including
establishing hedging strategies, approving and executing transactions, collecting, reviewing and communicating exposure
information, management reporting, deal confirmation, settlement and accounting responsibilities are assigned to specific
staff members. This clear identification of responsibility encourages accountability and transparency and is designed to
prevent any conflict of interest.
Reporting Requirements of Foreign Exchange Risk Management Policies
Our foreign exchange risk management policies require periodic reports to be prepared and submitted to senior
management. These reports help to ensure that the Board constantly measures and reviews the effectiveness of risk
management activities and helps to ensure that the operational staff adhere to the risk management policies.
Some of the reports required to be submitted to senior management include:
Value at Risk Report reviewing the extent of limit utilization and risk taken by individual dealers;
Exceptions Report recording any exceptions particular in relation to breach of various limits that have been
predetermined by senior management;
Stress Test Report, which assesses the risk impact of stress scenarios;

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Net Position Report recording the net positions taken in various currencies;
Back-testing Report, which compares predicted losses with actual profit/loss recorded; and
Profit and Loss Report, which documents the performance of a particular dealer.