Annual Report 2019
30.
Central Bank of the Republic of Armenia
Notes to the 2019 consolidated financial statements
Risk management (continued)
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.
Within the three-level management structure the Board defines the overall risk tolerance, which is the acceptable level
of interest rate risk in the long run. It also outlines portfolio optimisation principles. The risk tolerance is defined as a
minimum acceptable return over a certain period of time (now three years) with a 95 percent confidence level.
The authority to set tactical benchmarks is delegated to the Investment Committee.
The purpose of tactical benchmarks is to maximize return in a shorter period (one year). In contrast to strategic decisions,
benchmarks take into account current market trends and forecasts. Optimal portfolios are constructed based on scenario
analysis using VAR-MGARCH model simulated yield curves as well as internal and market consensus expectations on
interest rates and credit spreads. For optimal portfolio selection Black-Litterman and Markowitz models with certain
constraints are used.
For monitoring and managing risk, the Risk Management Department within the Financial Markets Directorate uses a
number of widely used risk measures like Value at Risk, Key Rate Duration, Information Ratio, Spread Duration,
PCA Duration, and Tracking Error.
The following table demonstrates the sensitivity of the Group's equity, which is calculated by revaluing fixed rate financial
assets measured at fair value through other comprehensive income at 31 December 2019 for the effects of the assumed
changes in interest rates. The sensitivity of equity is analysed by maturity of the asset. The sensitivity of equity is based
on the assumption that there are parallel shifts in the yield curve.
2019
2018
In thousands of Armenian Drams
Change in
yield curve, b.p.
Effect
on equity
Change in
yield curve, b.p.
Effect
on equity
Currency
AMD
AMD
USD
USD
+100
-100
+35
-35
(617,272)
671,185
+100
-80
(616,764)
532,393
(19,763)
7,868
+50
(16,287)
-15
5,229
The following table demonstrates the sensitivity of profit of the Group, which is calculated by revaluing financial
instruments at fair value through profit and loss as of 31 December 2019 and 31 December 2018, based on the
assumption of changing interest rates. Amounts included in the table below are presented in the original currency.
Currency
USD
EUR
GBP
Change in
basis points
+100/-100
+50/-50
+20/-20
2019
Increase/(decrease) of
net result on financial
instruments at FVTPL
and equity
(4,380,747)/4,380,747
(503,299)/503,299
(26,083)/26,083
Change in
basis points
+50/-15
+20/-1
+50/-20
2018
Increase/(decrease) of
net result on financial
instruments at FVTPL
and equity
(2,595,600)/778,680
(65,493)/817,498
(130,250)/52,100
The Group, also, has liabilities with floating interest rates outstanding as at 31 December 2019 and 31 December 2018.
The following table demonstrates the sensitivity of the Group's profit or loss and equity as at 31 December 2019 and
31 December 2018 based on the assumption of changing interest rates on borrowings obtained by the Group:
In thousands of Armenian Drams
Change in
basis points
Currency
USD
SDR
+/-145
+/-41
2019
Increase/(decrease) of
net interest expense and
decrease/(increase) of
equity
299,205/(299,205)
394,759/(394,759)
Change in
basis points
+/-161
+/-36
2018
Increase/(decrease) of
net interest expense and
decrease/(increase) of
equity
342,279/(342,279)
407,588/(407,588)
The sensitivity of the valuation technique inputs used in the fair value measurement for level 3 measurements is disclosed
in Note 29.
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