✨ Financial Statements Notes
THE WAIKATO COMMUNITY TRUST INCORPORATED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2012
16.3 Market Risk
Market risk is the risk that the fair value of future cash flows from financial assets and liabilities will fluctuate due to changes in market variables such as foreign currency exchange rates, interest rates and equity prices. Market risk is managed and minimised by ensuring that all investment activities are undertaken in accordance with the investment strategies and policies set out by the Trust.
16.3.1 Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair value of financial assets. The Trust holds investments in domestic and global bonds. The Trust’s investments in global bonds are held in pooled funds. In determining the volatility factor for interest rate risk, the Trust has analysed the average annual absolute movement in the yields of 10 year New Zealand and US Government bonds. US Government bonds were used as a proxy for global bond markets. Based on this, the Trust has adopted a volatility factor for interest rate risk of 0.80% for the Trust’s cash, domestic bond and global bond portfolios.
16.3.2 Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Trust is exposed to currency risk both directly through investments denominated in a foreign currency and also indirectly where investment funds invest in foreign currency securities.
The Trust’s usual practice is to hedge close to 100% of its foreign exchange risk by using a separate currency overlay when investing in a hedged pool. The Trust may choose to vary its hedging position when there is strong evidence that the currency appears to be in an extreme position. At such a time the variation will not go below 50% hedging of all foreign exposure. Such forward exchange contracts have the economic effect of converting foreign currency denominated balances into New Zealand Dollars. These forward exchange contracts are not treated as hedges for accounting purposes.
In determining the volatility factor for currency risk the Trust has examined the average absolute divergence between the unhedged and hedged annual returns of the MSCI World Index ex Australia (in NZ Dollar terms) over the past 10 years. Based on this, Trust Waikato has adopted a volatility factor for currency risk of 14% for the unhedged portion of the Trust’s global investments.
At balance date the Trust’s exposure to currency risk was as follows:
| NZ $'000 2012 | NZ $'000 2011 | |
|---|---|---|
| Financial assets with currency exposure | 184,249 | 179,111 |
| Hedged currency exposure as at 31 March | (167,615) | (172,451) |
| Unhedged currency exposure at 31 March | 16,634 | 6,660 |
Unhedged currency exposure
| Region | NZ $'000 2012 |
|---|---|
| USA and Canada | 8,849 |
| United Kingdom and Europe | 3,250 |
| Australia | 5,490 |
| Japan | 1,045 |
| Unhedged currency exposure at 31 March | 16,634 |
Next Page →
NZ Gazette 2012, No 97
✨ LLM interpretation of page content
💰
Notes to Financial Statements for The Waikato Community Trust Incorporated
(continued from previous page)
💰 Finance & RevenueFinancial Statements, Market Risk, Interest Rate Risk, Currency Risk, Investment Strategy, Waikato Community Trust