120 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V.  NOTE 4 VALUATION OF SHARE APPRECIATION RIGHTS AND  SHARE OPTIONS RECOGNITION OF PROVISIONS NOTE 4 FINANCIAL AND INSURANCE RISKS  GENERAL Because of the inability to measure the fair value of employee  services directly, fair value is measured by reference to the fair  value of the rights and options granted. This value is estimated  using the binomial option pricing model, taking into account the  respective vesting and exercise periods of the share  appreciation rights and share options.  The volatility is derived from quotations from external market  sources and the expected dividend yield is derived from  quotations from external market sources and the binomial  option pricing model. Future blackout periods are taken into  account in the model in conformity with current blackout  periods. The expected term is explicitly incorporated in the  model by assuming that early exercise occurs when the share  price is greater than or equal to a certain multiple of the  exercise price. This multiple has been set at two based on  empirical evidence. The risk free rate is the interest rate for  Dutch government bonds.  Provisions are established for contingent liabilities when it is  probable that a past event has given rise to a present obligation  or loss and the amount can be reasonably estimated.  Management exercises judgment in evaluating the probability  that a loss will be incurred. The estimate of the amount of a  loss requires management judgment in the selection of a proper  calculation model and the specific assumptions related to the  particular exposure. As an insurance company, AEGON is in the ‘business of risk’  and as a result is exposed to a variety of risks. A description of  AEGON’s risk management and control systems is given below  on the basis of significant identified risks for us. Some risks,  such as currency translation risk, are related to the  international nature of AEGON’s business. Other risks include  insurance related risks, such as changes in mortality and  morbidity. However, AEGON’s largest exposures are to changes  in financial markets (e.g. interest rate, credit and equity market  risks) that affect the value of the investments, liabilities from  products that AEGON sells, deferred expenses and value of  business acquired. AEGON manages risk at local level where business is transacted,  based on principles and policies established at the Group level.  AEGON’s integrated approach to risk management involves  Results of AEGON’s sensitivity analyses are presented  throughout this section to show the estimated sensitivity of net  income and shareholders’ equity to various scenarios. For each  type of market risk, the analysis shows how net income and  shareholders’ equity would have been affected by changes in the  relevant risk variable that were reasonably possible at the  reporting date. For each sensitivity test the impact of a  reasonably possible change in a single factor is shown. The  As part of its risk management programs, AEGON takes  inventory of its current risk position across risk categories.  AEGON also measures the sensitivity of net income and  shareholders’ equity under both stochastic and deterministic  scenarios. Management uses the insight gained through these  ’what if?’ scenarios to manage the Group’s risk exposure and  capital position. The models, scenarios and assumptions used  are reviewed regularly and updated as necessary. AEGON operates a Derivative Use Policy and a Reinsurance Use  Policy to govern its usage of derivatives and reinsurance. These  policies establish the control, authorization, execution and  monitoring requirements of the usage of such instruments. In  addition, these policies stipulate necessary mitigation of credit  risk created through these derivatives and reinsurance risk  management tools. For derivatives, credit risk is normally  mitigated by requirements to post collateral via credit support  annex agreements. For reinsurance, credit risk is normally  mitigated by downgrade triggers allowing AEGON’s recapture  of business, funds withheld by treaties (when AEGON owns the  assets) and assets held in trust for the benefit of AEGON (in the  event of reinsurer insolvency). common measurement of risk and scope of risk coverage to  allow for aggregation of the Group’s risk position.  To manage its risk exposure, AEGON has risk policies in place.  Many of these policies are Group wide while others are specific  to the unique situation of local businesses. The Group level  policies limit the Group’s exposure to major risks such as equity,  interest rates, credit and currency. The limits in these policies in  aggregate remain within the Group’s overall tolerance for risk  and the Group’s financial resources. Operating within this policy  framework, AEGON employs risk management programs  including asset liability management (ALM) processes and  models, hedging programs (which are largely conducted via the  use of derivatives) and insurance programs (which are largely  conducted through the use of reinsurance). These risk  management programs are in place in each country unit and  are not only used to manage risk in each unit, but are also part  of the Group’s overall risk management. 