32.2 Market Risk

Market Risk

Market risk is the risk that the fair value and future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates, and prices of equity and fixed income securities.

 

a) Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments.

The Group is exposed to interest rate risk on its interest bearing assets and liabilities.

The following table demonstrates the sensitivity of the income statement to reasonably possible changes in interest rates, with all other variables held constant, of the Group’s result for the year.

The sensitivity of the income statement is the effect of the assumed changes in interest rates on the Group’s profit for one year, based on the floating rate financial assets and financial liabilities held at 31 December 2017.


THE PERFORMANCE in 2017

From a global perspective, 2016 was a year of contradictions, characterized by the reduction of systemic risks such as a European banking crisis but the rise of political risks in the western world. The start of the year 2016 was overshadowed
by fears of a global recession leading to a major correction risky investments until mid-February 2016. For the remainder of the year, risky assets recovered with returns diverging strongly across regions and currencies. The UK Brexit vote and the US Presidential election led to shortterm


  Effect on profit and equity
AED’000
2017  
+100 increase in basis points 10,100
-100 decrease in basis points (10,100)
2016
+100 increase in basis points 10,006
-100 decrease in basis points (10,006)

 

b) Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board of Directors has set limits on positions by currency. Positions are monitored on a daily basis and it is ensured these are maintained within established limits.

Foreign currency risk is limited since a significant proportion of the Group’s transactions, monetary assets and liabilities are denominated in U.A.E. Dirham and U.S. Dollar. As the U.A.E. Dirham is pegged to the U.S. Dollar, balances in U.S. Dollar are not considered to represent significant currency risk. Exposure to other currencies is insignificant to the overall Group.

 

c) Price risk 

Price risk is the risk that the fair values of equities and fixed income securities decrease as the result of changes in the levels of equity and fixed income indices and the value of individual instruments. The price risk exposure arises from the Group’s investment portfolio.

The following table estimates the sensitivity to a possible change in equity and fixed income markets on the Group’s income statement.  The sensitivity of the income statement is the effect of the assumed changes in the reference equity and fixed income benchmarks on the fair value of investments carried at fair value through profit or loss.



  Assumed level of change Impact on net income and equity 2017 Impact on net income and equity 2016
AED’000 AED’000
Investments carried at fair value through profit or loss
Abu Dhabi Securities Market Index 2%

1,791

2,463

Dubai Financial Market Index 2%

1,706

1,582

Fixed income securities 2%

30

50

 

The effect on equity (as a result of a change in the fair value of equity instruments carried at fair value through other comprehensive income) due to a reasonably possible change in equity indices, with all other variables held constant, is as follows.

 

  Assumed level of change Impact on equity 2017 Impact on equity 2016
AED’000 AED’000
Investments carried at fair value through other comprehensive income
Abu Dhabi Securities Market Index 2%

3,519

3,024

Dubai Financial Market Index 2%

803

938

Kuwait Stock Exchange 2%

371

488

Unquoted investments 2%

1,858

2,003

 

The effect of decreases in prices of equity and fixed income securities is expected to be equal and opposite to the effect of the increases shown above.