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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of US dollars)
4. Financial instruments
(continued)
37
Dar Al-Maal Al-Islami Trust
Annual Report 2011
Trading portfolios include those
positions arising from market-
making transactions where the
Group acts as principal with
clients or with the market. Non-
trading portfolios primarily arise
from the management of the entity’s
retail and commercial banking
assets and liabilities. Non-trading
portfolios also consist of foreign
exchange and equity risks arising
from the Group’s available-for-sale
investments and held-to-maturity
investments.
(a) Foreign exchange risk
The Group takes on exposure to the
effects of fluctuations in the prevailing
foreign currency exchange rates on
its financial position and cash
flows. The boards of directors of
individual entities within the Group
set limits on the level of exposure by
currency and in aggregate for both
overnight and intra-day positions,
which are monitored daily.
(b) Profit rate risk
Profit rate risk is the risk that the
value of the financial instrument
will fluctuate due to changes in
the market profit rates. Movement
in the market profit rates may affect
the earnings of the Group.
The profit rate exposure taken by the
Group arises from investing in
corporate, small-medium enterprises,
consumer financing, investment
banking and inter-banking activities
where variation in market profit rates
may affect the profitability of the
Group. The risk is managed by the
management of individual entities.
The profit rate dynamics are
reviewed at regular intervals and
repricing of assets and liabilities
are adjusted to ensure that the
spread of the subsidiary remains at
an acceptable level.
The financings and deposits of the
Group are broadly linked to the
market variable rates and thus get
automatically repriced on a periodic
basis based on profit rate scenarios.
Currency risk
Assuming that all other variables held constant, the impact of currency risk
on the consolidated statement of income/equity based on reasonable shift is
summarised below:
As at 31 December 2011
USD/EUR USD/BHD USD/AED USD/GBP
Total currency exposure
(143,845) (481,562) (307,489) (44,711)
Reasonable shift
0.9% 0.02% 0.01% 0.5%
Total effect on income/equity
(1,311)
(83)
(17)
(221)
As at 31 December 2010
Total currency exposure
(243,257) (439,106) (301,890) (36,763)
Reasonable shift
0.2 % 0.1 % 0.1 % 0.4%
Total effect on income/equity
(431)
(326)
(386)
(149)
The basis for calculation of the reasonable shift is arrived at by comparing
the foreign exchange spot rate at 31 December as compared to the one year
forward rate for the same period.