122 30. Risk management, continued: Market risk, continued Foreign exchange risk Commodity price risk, continued CAPITAL POWER CORPORATION Notes to the Consolidated Financial Statements (Tabular amounts in millions of Canadian dollars, except share and per share amounts) The Company employs specific volumetric limits and a Value-at-Risk (VaR) methodology to manage risk exposures to commodity prices on a consolidated basis. VaR measures the estimated potential loss in a portfolio of positions associated with the movement of a commodity price for a specified time or holding period and a given confidence level. Capital Power’s current period VaR uses a statistical confidence interval of 99% over a five business day holding period. This measure reflects a 1% probability that, over the five day period commencing with the point in time that the VaR is measured, the fair value of the overall commodity portfolio could decrease by an amount in excess of the VaR amount. The VaR methodology is a statistically-defined, probability-based approach that takes into consideration market volatilities and risk diversification by recognizing offsetting positions and correlations between products and markets. This technique makes use of historical data and makes an assessment of the market risk arising from possible future changes in commodity prices over the holding period. VaR should be interpreted in light of the limitations of the methodologies used. These limitations include the following: These limitations and the nature of the VaR measurements mean that the Company can neither guarantee that losses will not exceed the VaR amounts or that losses in excess of the VaR amounts will not occur more frequently than 1% of the time. As VaR is not a perfect predictor of risk, the Company undertakes back testing and periodically calibrates the VaR calculation to a 99% confidence level. The estimation of VaR takes into account positions from all wholly-owned subsidiaries and subsidiaries in which the Company has a controlling interest, and reflects the Company’s aggregate commodity positions from its trading and asset portfolios. Capital Power’s Board of Directors has approved the methodology for the ongoing determination of commodity risk limits, under their commodity risk management policy. Commodity risk is monitored and reported to the executive team on a daily basis. The portfolios are stress tested regularly to observe the effects of plausible scenarios taking into account historical maximum volatilities and maximum observed price movements. Based on the commodity portfolio as at December 31, 2012, there is a 99% probability that unfavourable daily market variations would not reduce the trading portfolio by more than $6 million. The Company is exposed to foreign exchange risk on foreign currency denominated forecasted transactions, firm commitments, and monetary assets and liabilities denominated in a foreign currency and on its net investments in foreign operations. The Company’s operations expose it to foreign exchange risk arising from transactions denominated in foreign currencies. The Company’s foreign exchange risk arises primarily with respect to the U.S. dollar but it is potentially exposed to changes in other currencies if and when it transacts in other currencies. The risk is that the functional currency value of cash flows will vary as a result of the movements in exchange rates.  VaR calculated based on a holding period may not fully capture the market risk of positions that cannot be liquidated or hedged within the holding period.  The Company computes VaR of the portfolios at the close of business and positions may change substantially during the course of the day.  VaR, at a 99% confidence level, does not reflect the extent of potential losses beyond that percentile. Losses on the other 1% of occasions could be substantially greater than the estimated VaR.