The Treasury

Global Navigation

Personal tools

Market Risk

Market risk is defined as the impact of changes in interest rates or exchange rates on portfolio value.

The objective of NZDMO’s market risk management is to limit this risk within parameters that allow for the achievement of its other financial objectives, including earning a satisfactory rate of return on liquid assets and adding value in its foreign currency execution activities.

NZDMO has implemented an asset and liability matching (ALM) policy to manage risk within its portfolios. The policy aims to minimise the currency and interest rate risks to NZDMO's revenues and balance sheet, by matching the characteristics of its assets to those of its liabilities, where practicable. The range of instruments used to minimise exposure to market risk includes debt instruments, financial assets, foreign exchange contracts, currency swaps, interest rate swaps and futures contracts.

NZDMO is exposed to market risk when assets and liabilities are imperfectly matched. The risk is managed through the use of Value at Risk (VaR) limits and stop-loss limits.

The VaR limit is expressed over daily, monthly and annual time horizons at 95% confidence level and reflects the risk tolerance of the Government in respect of NZDMO's activities. NZDMO uses back‐testing to evaluate the performance of the VaR model, and stress‐testing is carried out to understand how extreme or unusual events would impact on the portfolio. Monthly, quarterly and annual stop‐loss limits are in place to protect NZDMO from further losses once actual losses reach a certain point.

Because NZDMO's liabilities exceed its assets, it also incurs market risk associated with the net volume of outstanding government debt. Fluctuations in the net market value of New Zealand-dollar debt as a result of interest rate movements are not actively managed, and unmatched debt is accounted for on an amortised cost basis.

Foreign Currency Risk Management

NZDMO's net foreign currency debt position is kept close to zero, as indicated in the schedules below.

As at 30 June 2010 NZD
$m		 USD
$m		 Yen
$m		 Euro
$m		 AUD
$m		 Other
$m		 Carrying
Value
$m

Cash, Cash Equivalents and Receivables

              
Crown settlement account 6,988 - - - - - 6,988
Crown trust account 16 - - - - - 16
Foreign cash and cash equivalents - 1,058 64 5 1 5 1,133
Debtors and receivables - - - - - - -

Advances

              
RBNZ - 1,724 - 1,003 - - 2,727
Crown Financing Agency 1,494 - - - - - 1,494
Housing New Zealand 1,835 - - - - - 1,835
New Zealand Railways Corporation 448 - - - - - 448
Non-Crown 86 - - - - - 86

Financial Assets

              
Marketable securities 1,628 1,480 310 48 559 72 4,097
External deposits 204 27 37 50 48 101 467
Derivatives in gain 6,539 (1,362) 1,150 (3,144) (936) (640) 1,607
IMF financial assets 6 965 241 746 - 241 2,199
Total Financial Assets 19,244 3,892 1,802 (1,292) (328) (221) 23,097

Overdrafts and Payables

              
Crown disbursement account 3,463 - - - - - 3,463
Creditors and payables 30 - - 11 11 14 66

Financial Liabilities

              
NZ dollar government securities 47,655 - - - - - 47,655
Euro-commercial paper - - - - - - -
Foreign currency debt - 440 354 - - 15 809
Collateral - 981 - - - - 981
Derivatives in loss 974 1,597 1,256 (2,168) (337) (462) 860
Departmental deposits - 66 - 234 4 3 307
IMF allocation - 801 200 619 - 200 1,820
Immigration investor policy bonds 92 - - - - - 92
Other 1 - - - - - 1
Total Financial Liabilities 52,215 3,885 1,810 (1,304) (322) (230) 56,054
Net Currency Holdings (32,971) 7 (8) 12 (6) 9 (32,957)

Financial Instruments: Fair Value Hierarchy

NZDMO measures some financial instruments at fair value based on the designation or classification of the instruments into “Fair value through profit or loss” or “Available-for-sale” categories for financial instruments. The following table provides a fair value hierarchy, as required by NZ IFRS7, that reflects the significance of the inputs used in making the fair value measurements. The hierarchy levels are Level 1 (quoted market prices), Level 2 (observable inputs) and Level 3 (unobservable inputs).

Financial Instruments: Fair Value Hierarchy
      Hierarchy
As at 30 June 2010 Carrying Value
$m		 Fair Value
Measurement
$m		 Level 1
$m		 Level 2
$m		 Level 3[24]
$m

Cash, Cash Equivalents and Receivables

          
Crown settlement account 6,988 - - - -
Crown trust account 16 - - - -
Foreign cash and cash equivalents 1,133 1,120 - 1,120 -
Debtors and receivables - - - - -

Advances

          
RBNZ 2,727 2,727 - 2,727 -
Crown Financing Agency 1,494 1,494 - 1,494 -
Housing New Zealand 1,835 977 - 977 -
New Zealand Railways Corporation 448 448 - 448 -
Non-Crown 86 71 - 31 40

Financial Assets

          
Marketable securities 4,097 4,097 3,629 468 -
External deposits 467 467 - 467 -
Derivatives in gain 1,607 1,607 - 1,607 -
IMF financial assets 2,199 - - - -
Total Financial Assets 23,097 13,008 3,629 9,339 40

Overdrafts and Payables

          
Crown disbursement account 3,463 - - - -
Creditors and payables 66 - - - -

Financial Liabilities

          
Treasury bills - market 7,823 1,002 - 1,002 -
Treasury bills - non-market 174 - - - -
Government bonds - market 30,705 3,891 3,891 - -
Government bonds - non-market 6,580 - - - -
Inflation-indexed bonds - market 1,588 - - - -
Inflation-indexed bonds - non-market 476 - - - -
Kiwi bonds 309 - - - -
Euro-commercial paper - - - - -
Foreign currency debt 809 809 - 809 -
Collateral 981 981 - 981 -
Derivatives in loss 860 860 - 860 -
Departmental deposits 307 307 - 307 -
IMF allocation 1,820 - - - -
Immigration investor policy bonds 92 - - - -
Other 1 - - - -
Total Financial Liabilities 56,054 7,850 3,891 3,959 -

Notes

  • [24]For reasons of materiality, NZDMO has not completed the reconciliation from beginning to ending balances for Level 3 instruments.
Page top