✨ Financial Statements Notes
27 AUGUST 2014 NEW ZEALAND GAZETTE, No. 101 2793
THE WAIKATO COMMUNITY TRUST INCORPORATED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2014
12.2 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 established mandate limits and the investment strategies and policies set out by the Trust.
12.2.1 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 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 are used as a proxy for global bond markets. Based on this, the Trust has adopted a volatility factor for interest rate risk of 0.71% (2013: 0.70%) for Trust cash, domestic bond and global bond portfolios.
The sensitivity rates differ from the previous year because of the volatility in the international currency and financial markets experienced over the past year. The disclosures adopted provide a more accurate measurement for the movement in the future, due to current market volatility.
12.2.2 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 when investment funds invest in foreign currency securities.
The Trust usual practice is to hedge close to 100% of its foreign exchange risk by using a separate currency overlay or 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 11% (2013: 12%) for the unhedged portion of the Trust global investments.
Full NZ IFRS Financial Statements for the year ended 31 March 2014
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NZ Gazette 2014, No 101
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Notes to the Financial Statements of The Waikato Community Trust Incorporated
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💰 Finance & Revenue24 July 2014
Financial Statements, Investments, Risk Management, Commitments, Equity, Market Risk, Interest Rate Risk, Currency Risk