| | The
VAR computation is a risk analysis tool designed to statistically estimate the
maximum probable ten-day loss from adverse movements in foreign currency rates,
equity prices and interest rates under normal market conditions. The computation
does not purport to represent actual losses in fair value on earnings to be incurred
by the Group, nor does it consider the effect of favorable changes in market rates.
The Group cannot predict actual future movements in such market rates and it does
not claim that these VAR results are indicative of future movements in such market
rates or to be representative of any actual impact that future changes in market
rates may have on the Group’s future results of operations or financial position.
In addition to these VAR analyses, the Group uses stress testing techniques that
aim to reflect a worst case scenario. For these calculations, the Group uses the
worst movements during a period of six months over the past 20 years in each category.
For 2005 and 2004, the worst-case-loss scenario was configured as follows:
 | | In
the Group’s risk analysis, Novartis considered this worst-case scenario acceptable
inasmuch as it could reduce the income, but would not endanger the solvency and/or
the investment-grade credit standing of the Group. While it is highly unlikely
that all worst-case fluctuations would happen simultaneously, as shown in the
model, the actual market can of course produce bigger movements in the future
than it has historically. Additionally, in such a worst-case environment, management
actions could further mitigate the Group’s exposure.
The major financial risks facing the Group are managed centrally by Group Treasury.
Only residual risks and some currency risks are managed in the subsidiaries. However
the collective amount of the residual risks is below 10% of the global risks.
Novartis has a written Treasury Policy and has implemented
a strict segregation of front office and back office controls. The Group does
regular reconciliations of its positions with its counterparties. In addition
the Treasury function is included in Management’s internal control assessment. | |
