BANK OF BAKU
 AUDITORS REPORT AND
FINANCIAL STATEMENTS AT
31 DECEMBER 1998
Note 19 - Fair value of financial instruments
Fair value is the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation, and is best evidenced by a quoted market price.
The estimated fair values of financial instruments have been
determined by the Bank using available market information and appropriate
valuation methodologies, where they exist. However, judgment is necessarily
required to interpret market data to determine the estimated fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amount the Bank could realize in a current market exchange.
Management does not believe that it is practicable to
estimate the fair value of loans and term deposits. These instruments are not
currently traded in the Azeri financial markets and an objective estimate of
fair value is not available. The stability of the interest rate and exchange
rate environment significantly affects the fair value of financial instruments.
NBAR has from time to time significantly changed interest rates in order to
support the Manat. However, the exchange rate of the Manat against fully
convertible currencies has been stable since the beginning 1996. Management
considers the interest rate and exchange rate environment in setting interest
rates on loans and term deposits and they intend that the fair value of these
instruments approximates fair value at the date of issuance. Management reduces
the risk of significant fluctuations in fair value by issuing loans and term
deposits with short maturities. However, because of these factors, management
does not believe that an objective basis for the fair value of loans and term
deposits can be obtained with sufficient reliability in a cost effective manner.
The following methods and assumptions were used to estimate
the fair value of the Banks other financial instruments: Financial assets
For monetary assets, excluding loans, fair value approximates
carrying value and balances denominated in foreign currencies have been
translated at appropriate year-end exchange rates.
The fair values of certain financial assets carried at cost,
including cash and due from banks, amounts due from other banks, accrued
interest and other financial assets are considered to approximate their
respective carrying values due to their short-term nature and negligible credit
losses.
Financial liabilities
For monetary liabilities, excluding term deposits, fair value
approximates carrying value and balances denominated in foreign currencies have
been translated at appropriate year end exchange rates. The fair value of
deposit liabilities without a stated maturity is the carrying amount.
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