hypothesis based on the data obtained for a certain period, the Company applies the stress test with a scenario supposing the impact of an abrupt change in the market and the hypothetical stress events. 

## (Quantitative information concerning market risk) 

Major subsidiaries engaged in securities business utilize the historical simulation method (holding period: 1 day, confidence interval: 99%, observation period: 520 business days) for calcu- lating VaR of products traded in the market. The VaR as of March 31, 2012 (fiscal year end) was 1.4 billion yen ($18 million) in total. In the meantime, Daiwa executes the back test which compares calculated VaR and the actual profit / loss and veri- fies its effectiveness. The VaR statistically figures the risk based on historical market fluctuation and may be sometimes unable to completely grasp the risk in an environment in which the market unexpectedly changes beyond the estimation. 

## (b) Management of credit risk 

Concerning transactions in the trading business which generate credit risk, Daiwa has established the credit limits based on ratings of counterparties in advance and monitored notional principals and credit amounts. Especially, in connection with the wholesale business that carries a relatively high credit risk, Daiwa assesses the credit condition of its counterparties with qualitative and quantitative analysis based on the rating analysis model. Daiwa also has established a credit limit for each of the counterparties considering transaction conditions such as the term, collateral, etc., and conducts daily monitoring. In addition, concerning the credit risk of financial instruments held in the trading business, Daiwa has established the upper limit of holding and the holding period in accordance with each issuer’s category and credit rating in relation to the relevant financial instruments, and monitored the circumstances of holding them. 

Because the margin transactions generate credit to custom- ers in Daiwa, deposits which were set as collateral will be charged to the customers. In connection with the securities loan transaction, Daiwa has tried to reduce credit risk by estab- lishing credit limit for counterparties, charging necessary col- laterals, and daily mark-to-market. 

(ii) Management of risk of financial instruments other than trading purpose 

Daiwa holds financial instruments for other than trading business such as operational investment securities, etc., as a result of the principal investments business and venture capital business and investment securities for the business relationship, and loans and securities, etc., in the banking business. These financial instruments carry market risk and credit risk as well. 

Because those financial instruments have a characteristic risk profile for each product, the Company has conducted risk management that suits each risk profile. The Company peri- odically monitors the situation of risk and informs it to the management of the Company. 

The subsidiaries which engage in the principal investments business investigate each investment through an investment committee in accordance with the investment limit approved by the Company and make each investment judgment. After investments, it establishes a strategy for restructuring gover- nance of invested companies and for exit. Also, it constructs a system which enables it to directly conduct monitoring of invested companies, if necessary, by sending personnel to invested companies. 

The subsidiaries which engage in the venture capital busi- ness narrow investment candidates down to the ones that have innovative technology or business models and make the invest- ment judgment at a meeting of the Board of Directors or invest- ment committee by conducting due diligence of the investment candidates and based on the result of examination by the examination division. After investment, it holds a risk manage- ment committee and monitors the situation and exit strategy from invested companies and financial influence on the busi- ness, etc. 

The subsidiary that engages in the banking business, estab- lished the management policy and management system for each risk which needs management. Furthermore, an ALM committee, a body under the Board of Directors, was estab- lished to discuss and decide the way to manage the risks. The committee manages the credit risk, market risk and liquidity risk, and discusses the important matters relating to the man- agement of assets, liabilities and capitals. The subsidiary con- trols the risks by doing business within the limited amount decided by the Board of Directors and the committees. 

In connection with investment securities as long-term holding for the business relationship, etc, Daiwa decides to acquire or sell the securities in accordance with the policy defined by the relevant company’s rules. Also, Daiwa monitors the situation of its investment portfolio. 

## (Quantitative information concerning market risk) 

(a) Financial assets and liabilities (excluding the financial assets and liabilities held by the subsidiaries which engage in the banking business) 

The main financial assets that are influenced by market risk are operational investment securities in the principal investments business and venture capital business and investment securi- ties for the business relationship. As of March 31, 2012, market prices of the listed equities in operational investment securities and investment securities would fluctuate by 11.1 billion yen ($135.5 million) if the index, such as TOPIX, were to change by 10%. 

Also the main financial liabilities in Daiwa that are influenced by market risk are bonds and notes and long-term borrowings. 

As of March 31, 2012, if all other risk variables were assumed to be unchanged and the interest rate supposed to change by 10 basis points (0.1%), the market prices of bonds and notes and long-term borrowings would fluctuate by 1.2 billion yen ($15.6 million) and 0.0 billion yen ($0.2 million), respectively. 

