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Allianz Annual Report 2012

Market and counterparty risks arising from the use of de- rivative financial instruments are subject to control proce- dures. Credit risks related to counterparties are assessed by calculating gross replacement values. Market risks are monitored by means of up-to-date value-at-risk calcula- tions and stress tests, and are limited by specific stop-loss limits. The counterparty settlement risk is virtually excluded in the case of exchange-traded products, as these are stan- dardized products. By contrast, over-the-counter (OTC) products, which are individually traded contracts, carry a theoretical credit risk amounting to the replacement value. The ­­Allianz Group therefore closely monitors the credit rat- ing of counter­parties for OTC derivatives. To reduce the counterparty risk from trading activities, so-called cross- product netting master agreements with the business part- ners are established. In the case of a defaulting counter- party, netting makes it possible to offset claims and liabilities not yet due. Other Information 43  – Derivative financial instruments Derivatives derive their fair values from one or more under- lying assets or specified reference values. Examples of derivatives include contracts for future deliv- ery in the form of futures or forwards, options on shares or indices, interest rate options such as caps and floors, and swaps relating to both interest rate and non-interest rate markets. The latter include agreements to exchange previ- ously defined assets or payment series. Derivatives used by individual subsidiaries in the ­­Allianz Group comply with the relevant supervisory regulations and the ­­Allianz Group’s own internal guidelines. The ­­Allianz Group’s investment and monitoring rules exceed regulations imposed by supervisory authorities. In addi- tion to local management supervision, comprehensive fi- nancial and risk management systems are in force across the ­­Allianz Group. Risk management is an integral part of the ­­Allianz Group’s controlling process that includes iden- tifying, measuring, aggregating and managing risks. Risk management objectives are implemented at the ­­Allianz Group level and by the local operational units. The use of derivatives is one key strategy used by the ­­Allianz Group to manage its market and investment risks. Insurance subsidiaries in the ­­Allianz Group use derivatives to manage the risk exposures in their investment portfolios based on general thresholds and targets. The most impor- tant purpose of these instruments is hedging against ad- verse market movements for selected securities or for parts of a portfolio. Specifically, the ­­Allianz Group selectively uses derivative financial instruments such as swaps, op- tions and forwards to hedge against changes in prices or interest rates in its investment portfolio. Within the ­­Allianz Group’s Banking business, derivatives are used both for trading purposes and to hedge against movements in interest rates, currency rates and other price risks of the ­­Allianz Group’s investments, loans, deposit li- abilities and other interest-sensitive assets and liabilities. Annual Report 2012    Allianz Group324