Corporate Summary Executive Messages Business Strategy Other Information Management Systems & CSR Financial Section 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. 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. 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. 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. 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. 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%. (a) Financial assets and liabilities (excluding the financial assets  and liabilities held by the subsidiaries which engage in the  banking business) 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. 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. 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 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. (b) Management of credit risk (ii) Management of risk of financial instruments other than trading  purpose 72 Daiwa Securities Group Annual Report 2012 (Quantitative information concerning market risk) (Quantitative information concerning market risk)