Daiwa Securities Group Annual Report 2012 These include transactions which are volatile because of the correla- tion with stock indices, foreign exchange rates and interest rates of  reference assets or which tend to move in a complicated manner.  Therefore, these carry higher risk than the reference assets. These  derivative transactions are categorized as trading assets in the con- solidated balance sheets and the realized and unrealized profit/loss by  fluctuation of fair values are recorded as the net gain on trading. Daiwa is raising its capital utilizing corporate bonds, medium-term  notes, borrowing from financial institutions, deposits, etc., as well as  holding its financial instruments, and is exposed to liquidity risk.  Liquidity risk indicates the risk of suffering losses such that cash  management may be impossible and remarkably higher financing  costs than usual may be requested as a result of an abrupt change of  market environment or unexpected credit crunch of Daiwa, etc. Subsidiaries engaged in the trading business utilize derivative  transactions as brokers and end-users. Derivative products have been  necessary to deal with a variety of customers’ financial needs and  subsidiaries engaged in the trading business provide customers with  financial instruments to meet their customers’ requests in many ways  as brokers. For instance, they provide customers with foreign cur- rency futures to hedge the exchange rate risk of foreign currency of  foreign bonds held by customers and interest rate swaps to hedge  interest rates when customers issue corporate bonds, etc. As end- users, they use interest rate swaps to hedge interest rate risk regard- ing financial assets and liabilities of Daiwa and utilize many kinds of  futures and options to hedge their trading positions. For risk management of Daiwa, the Company has resolved the “Risk  Management Rule” at the meeting of the Board of Directors which  states the basic policy of risk management, types of risks that should  be managed and responsible executive officers and department for  each major risk. Each subsidiary conducts risk management suitable  for each business profile and size in accordance with the basic policy  of risk management. And the Company monitors the structure and  process of subsidiaries’ risk management. Also, the Group Risk  Management Committee as a sub-committee of the Executive  Committee of the Company receives reports on matters such as risk  exposure obtained by monitoring of subsidiaries and issues concern- ing the risk management system of each subsidiary and discusses  them. Subsidiaries regularly hold risk management committee meet- ings, etc., and strengthen each risk management system. Daiwa holds financial instruments in the trading business as follows:  (a) trading securities and others (stocks and warrants, bonds and  units of investment trusts), loans secured by securities and loans  payable secured by securities, margin transaction assets and liabili- ties, (b) derivatives, traded on exchanges, such as stock index  futures, bond futures, interest rate futures and options for those, (c)  derivatives (OTC derivatives), not traded on exchanges, such as  interest rate and foreign exchange swaps, foreign currency futures,  currency options, bond options, FRA and OTC securities derivatives,  etc. And Daiwa holds operational investment securities, etc. in the  principal investments business and venture capital business, loans  and securities, etc. in the banking business and investment securities  for the business relationship, etc. Of the various risks, the major risks implied in these financial instru- ments are market risk and credit risk. Market risk means the risks of  suffering losses from fluctuations in the value of holding financial  instruments and transactions in accordance with changes of market  prices of interest rates, currency exchange rates and stock prices,  etc. and from the market environment in which no transaction can be  executed because of an excessive decrease of liquidity or one in  which market participants are focused to trade in extremely unfavor- able conditions. Credit risk means the risk of suffering losses from  defaults or credit changing of counterparts or issuers of financial  instruments which Daiwa holds, etc. In the trading business, Daiwa conducts derivative transactions  solely and as a part of structured notes to meet customers’ needs.  The Group manages its trading positions by establishing the  limit for VaR which indicates the estimate of the maximum loss  amount under a certain probability, position and sensibility etc.  considering the financial situation, the business plan and  budget of each division. The risk management department of  the Company recognizes the market risk of Daiwa and informs  the management of the Company on a daily basis. In order to  cover the capacity limit of VaR calculated by the statistical  (i) Management of risk of financial instruments held for trading  purpose 5. Financial instruments 1. Concerning the situation of financial instruments (1) Policy for dealing financial instruments (2) Contents and risk of financial instruments (3) Risk management system concerning financial instruments Daiwa, the primary businesses of which are investment and financial  services businesses with a core focus on securities related business,  is involved in trading and brokerage of securities and derivative prod- ucts, underwriting and secondary offering of securities, treating public  offerings for subscription and secondary offering of securities, treating  of private offerings for subscription of securities, and banking busi- ness or other businesses related to the securities and financial fields. Daiwa holds financial assets and liabilities as follows to execute its  businesses: securities, derivatives, operational investment securities,  loans and investment securities, etc. and raises its capital utilizing a  variety of financial instruments such as corporate bonds, medium- term notes, borrowing from financial institutions, deposits, etc. Under  the basic policy for financing that enough liquidity for continuing busi- ness should be effectively secured, Daiwa is maintaining an appropri- ate balance between assets and liabilities by diversifying financial  measures and maturity dates, and realizing effective and stable  financing when it decides to raise its capital. Also, Daiwa uses interest  rate swaps and foreign currency swaps, etc. for the purpose of hedg- ing fluctuation of interest rates and foreign currencies in terms of  financial assets and liabilities. Daiwa entirely and efficiently manages the variety of risks  incurred by holding financial assets and liabilities and maintains  sound finances. (a) Management of market risk 71