Macquarie Group Limited and its subsidiaries  2014 Annual Financial Report  macquarie.com.au  Notes to the financial statements  for the financial year ended 31 March 2014  continued  Note 38.3  Market risk  Market risk is the exposure to adverse changes in the value of the Consolidated Entity's trading portfolios as a result of changes in  market prices or volatility. The Consolidated Entity is exposed to the following risks in each of the major markets in which it trades:  – foreign exchange and bullion:  changes in spot and forward exchange rates and bullion prices and the volatility of exchange  rates and bullion prices;  – interest rates and debt securities:  changes in the level, shape and volatility of yield curves, the basis between different debt  securities and derivatives and credit margins;  – equities:  changes in the price and volatility of individual equities, equity baskets and equity indices, including the risks arising  from equity underwriting activity; and  – commodities and energy:  changes in the price and volatility of base metals, agricultural commodities and energy products;  and to the correlation of market prices and rates within and across markets.  – contingent loss limits : worst case scenarios that shock prices and volatilities by more than has occurred historically. Multiple  scenarios are set for each market to capture the non-linearity and complexity of exposures arising from derivatives. A wide  range of assumptions about the correlations between markets is applied;  – position limits:  volume, maturity and open position limits are set on a large number of market instruments and securities in  order to constrain concentration risk and to avoid the accumulation of risky, illiquid positions; and  – Value-at-Risk (VaR) limits:  statistical measure based on a 10-day holding period and a 99 per cent confidence level, as  stipulated by the APRA capital adequacy standard. The model is validated daily by back testing a one-day VaR against  hypothetical and actual daily trading profit or loss.  It is recognised that all trading activities contain calculated elements of risk taking. The Consolidated Entity is prepared to accept  such risks provided they are within agreed limits, independently and correctly identified, calculated and monitored by RMG, and  reported to senior management on a regular basis.  RMG monitors positions within the Consolidated Entity according to a limit structure which sets limits for all exposures in all  markets. Limits are for both individual trading desks and divisions as well as in aggregate. Trigger limits for the Consolidated Entity  as a whole ensure that if several trading book limits are being used simultaneously, the aggregate level of risk is in line with the  global risk appetite articulated in the economic capital model.  RMG sets three complementary limit structures:  The table below shows the average, maximum and minimum VaR over the year for the major markets in which the Consolidated  Entity operates. The VaR shown in the table is based on a one-day holding period. The aggregated VaR is on a correlated basis.  Value-at-Risk (VaR) figures (1-day, 99 per cent confidence level)  2014  Average  $m  2014  Maximum  $m  2014  Minimum  $m  2013  Average  $m  2013  Maximum  $m  2013  Minimum  $m  Consolidated  Equities  5.55  8.21  2.98  4.26  6.64  2.78  Interest rates  10.37  15.56  6.17  10.45  14.19  8.19  Foreign exchange and bullion  3.97  8.05  1.05  2.58  7.00  0.42  Commodities  13.08  20.89  7.36  10.02  16.95  6.35  Aggregate  18.09  28.23  9.38  14.95  20.44  10.94  Value-at-Risk  The VaR model uses a Monte Carlo simulation to generate normally distributed price and volatility paths, based on three years of  historical data. VaR focuses on unexceptional price moves so that it does not account for losses that could occur beyond the 99  per cent level of confidence. These factors can limit the effectiveness of VaR in predicting future price moves when changes to  future risk factors deviate from the movements expected by the above assumptions. For capital adequacy purposes, debt-specific  risk is measured using APRA’s standard method, whilst all other exposures are captured by the VaR model. This combined  approach has been approved by APRA and is subject to periodic review.  Interest rate risk  The Consolidated Entity also has exposure to non-traded interest rate risk generated by banking products such as loans and  deposits. Banking businesses have small limits to accumulate small levels of interest rate risk. Wherever possible, these interest rate  risks are transferred into the trading books of FICC and Group Treasury which are managed within traded market risk limits and are  included within the VaR figures presented above. Some residual interest rate risks remain in the banking book. These residual risks  have independent limits that are monitored by RMG. 192 