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## 8. Market Risk 

## A). Overview of risk management policies and procedures 

Under the Group’s trading position, with considering soundness in financial outstanding and business plan, and budget, limits on VaR, position, and sensitivity are set. The Group’s Risk Management Department monitors market risk and accordingly reports to the managements daily. 

Back testing is being conducted in order to verify accuracy of VaR model. In addition, so as to support VaR which have calcu- lated based upon given time horizon and statistical hypothesis, stress test is conducted by applying historical and hypothetical stress events as a scenario. 

## B). Methods used for calculation of market risk 

i. Internal Models Approach 

General market risk for Daiwa Securities Capital Markets, and foreign subsidiaries 

ii. Standardized Approach 

Specific risk 

General market risk that is not included in above query “i.” 

## C). The method in order to adequately evaluate price in accordance with characteristics of the product/transaction, with recognizing the assumed holding period and the inability to close the positions within the period 

The Group’ sets forth the policies and operational manual regard- ing valuation. The independent risk control department from the department which engages with trading businesses carefully analyzes and reviews the relevancy of value and valuation method, and such results are periodically reviewed by the external audit. 

## 9. Operational Risk 

## A). Risk management policies and procedures 

As the Group’s business becomes more sophisticated, diversified, and systemized, the accompanying risks become more varied, and as a result the need to manage such operational risk grows each year. The Group’s major subsidiary companies engage in RCSA (Risk Control Self Assessment) in compliance with opera- tional risk management rule, and adequately manage operational risk. In addition, due to the diversifying nature of its business, the Group also sets rigid rules concerning authority, automates office 

## D). Overview and the explanation of internal model and explanation of back-testing and stress test 

The Group uses VaR as well as Stressed VaR in which indicates maximum potential loss under stress period. In addition, in order to test accuracy of VaR, the Group conducts back-testing so as to reconcile VaR against actual profit and loss. Likewise, stress test is conducted in order to grasp possible loss incurred as a result of historical and hypothetical stress event. 

## E). Overview of the model used when incremental risk is measured by internal model. 

Not applicable 

## F). Overview of the model used when comprehensive risk is measured by internal model. 

Not applicable 

## G). Assumptions and the methods in internal capital adequacy assessment of market risk. 

Historical simulation model that uses historical market scenario are used. Assumptions of historical simulation model are stated as followings: 

<img src='content_image/260656.jpg'>

(Note 2) As for March 2012, observation holding period as for VaR calculation has changed from a 1 day holding period scaled up to 10 days to a 10 days holding period. 

work processes to reduce human error, prepares business manu- als, and takes other necessary measures. Each Group company strives to reduce operational risk according to the nature of its own business. 

## B). Methods for the calculation of operational risk amount 

The Basic Indicator Approach is used for the calculation of opera- tional risk amount. 

## 10. Overview of Risk Management Policy and Procedure for Equity Exposure on Non Trading Accounts 

The Group holds financial instruments for non trading businesses such as principal investments business, venture capital business, and investment securities for the business relationship. Because those financial instruments have specific risk profiles for each product, the Group conducts adequate credit as well as market risk managements including measurement of risk by the profile. 

For the consolidated subsidiaries, the scopes of the risk manage- ment are assets and liabilities. For the affiliated companies, the 

scopes of the risk management are equity exposures. Those are subject to the risk management in each classification. 

Also, marketable available-for-sale securities are stated at their fair values based on quoted market consolidated closing prices (the unrealized gain or loss is fully recognized, and the cost of products sold is mainly pursuant to moving average method). Non-marketable available-for-sale securities are carried at cost by moving average method. 

