17  The risk of interest rates, and thereby bond prices, developing unfavourably and thereby having a direct impact on the results. This risk increases with the length of the average duration of the investments. 4  BIS Review 33/2006  Summary To summarise, the decisions I and my colleagues make regarding the focus of the Riksbank’s financial asset management ensure that the management complies with the Riksbank's statutory tasks as well as providing good earnings. These tasks require us to hold US and European government bonds to enable us to intervene in the foreign exchange market if necessary. However, we must also limit the financial risk in order to protect the capital allocated to cover potential losses in connection with a financial crisis. We try to limit currency risk, which is the entirely dominant financial risk, by choosing a currency allocation that keeps the fluctuations, as measured in Swedish kronor, low. We endeavour to meet the requirement to generate good earnings by taking credit and interest rate risks and making use of diversification effects in order to reduce any negative impact from these risks. By investing in asset types with credit risk, that is, other fixed-income securities than government bonds, we can increase the risk-adjusted earnings on our investments. This is partly because the actual earnings on assets with credit risk can be higher and partly because the earnings on different types of asset do not usually covary perfectly.
Because of the sensitivity of this model, the analysis is supplemented by Value-at-Risk calculations, risk contribution analyses and stress tests. Value-at-Risk is an estimate of potential loss risk and is defined as the largest expected decline in value of an asset, or an asset portfolio, with a specific probability and over a specific period of time. 2  BIS Review 33/2006  As you can see, our largest holding is in euro. This is not surprising, as the relationship between the euro and the krona has remained relatively stable. Historically, the currency risk attributable to our euro holding has thus been less than that attributable to other currencies in the reserve. The dollar, on the other hand, has been one of the highest risk currencies. The fact that we nevertheless have a relatively large dollar exposure is due to its importance as intervention currency. It is reasonable to wonder why we do not choose to convert some of the currency assets into Swedish assets as long as we have a floating exchange rate regime. In this way the currency risk on these assets would disappear completely. In practice, however, this is not so easy as such a conversion would mean that we intervened in the foreign exchange market. In addition, when and if the Government decides that the krona should be part of a fixed exchange rate regime, we would be forced to intervene again to build up the foreign exchange reserve.