Consolidated Financial Statements 2023 · Page 158

Public Investment Fund and its subsidiaries 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
(All amounts in million SAR unless otherwise stated) 
Classification: External Confidential 
155 
 
42. 
FINANCIAL RISK MANAGEMENT (continued) 
 
42.3 Market risk 
 
Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market 
variables, whether those changes are caused by factors specific to the individual investment or its issuer or 
factors affecting all investments traded in the market. Market risk comprises of foreign exchange risk, 
interest rate risk, and price risks (commodity and equity).  
 
The objective of market risk management is to manage and control market risk exposures within 
acceptable parameters, while optimizing returns. 
 
(a) 
Market risk: Banking operations 
 
The Group’s subsidiaries in banking operations separate their exposure to market risk between trading and 
banking books. Trading book includes positions arising from market making and proprietary position 
taking, together with financial assets and liabilities that are managed on a fair value basis. 
 
Overall authority for market risk is vested to the Board of Directors of the respective subsidiaries. The Risk 
Group is responsible for the development of detailed risk management policies (subject to review and 
approval by the Board of Directors) and for the day-to-day review of their implementation. 
 
▪ 
Market risk – trading book 
The principal tool used to measure and control market risk exposure within the trading book is Value 
at Risk (VaR). The VaR of a trading position is the estimated loss that will arise on the position over a 
specified period of time (holding period) from an adverse market movement with a specified 
probability (confidence level). The VaR model used is based upon a 99 percent confidence level and 
assumes a 1-day holding period, except for FVTPL investments which are computed over a 3-month 
holding period (i.e., VaR is measured daily, except for VaR on FVTPL investments which are computed 
on a monthly basis), to facilitate the comparison with the trading income (loss) which is also 
computed and reported on a daily basis. The model computes volatility and correlations using 
relevant historical market data. 
 
VaR limits are used for total market risk embedded in trading activities including derivatives related 
to foreign exchange and interest rate. The overall structure of VaR limits is subject to review and 
approval by the Board of Directors. VaR limits are allocated to the trading book. The daily reports of 
utilization of VaR limits are submitted to the senior management. In addition, regular summaries 
about various risk measures are submitted to the Risk Committee. Although VaR is an important tool 
for measuring market risk, the assumptions on which the model is based gives rise to some 
limitations, including the following: 
• 
A 1-day holding period assumes that it is possible to hedge or dispose of positions within one day 
horizon. This is considered to be a realistic assumption in most of the cases but may not be the 
case in situations in which there is severe market illiquidity for a prolonged period. 
• 
A 99% confidence level does not reflect losses that may occur beyond this level. Even within the 
model used there is a 1% probability that losses could exceed the VaR 
• 
VaR is calculated on an end-of-day basis and does not reflect exposures that may ar