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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, FX 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 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.

Foreign Currency Risk Management
As at 30 June 2011 NZD
$m
USD
$m
Yen
$m
Euro
$m
AUD
$m
Other
$m
Carrying Value
$m

Cash, Cash Equivalents and Receivables

             
Crown settlement account 13,060 - - - - - 13,060
Crown trust account 38 - - - - - 38
Foreign cash and cash equivalents - 1,356 20 13 39 33 1,461
Debtors and receivables 536 - - - - - 536

Advances

             
RBNZ - 1,447 - 991 - - 2,438
Crown Health Financing Agency 1,750 - - - - - 1,750
Housing New Zealand 1,859 - - - - - 1,859
New Zealand Railways Corporation 505 - - - - - 505
New Zealand Transport Agency 110 - - - - - 110
Other Crown 4 - - - - - 4
Non-Crown 151 - - - - - 151

Financial Assets

             
Marketable securities 1,355 1,132 202 - 506 47 3,242
External deposits 104 - - 11 - - 115
Derivatives in gain 14,508 (9,134) (185) (1,805) (438) (457) 2,489
IMF financial assets 8 905 203 808 - 244 2,168
Total Financial Assets 33,988 (4,294) 240 18 107 (133) 29,926

Overdrafts and Payables

             
Crown disbursement account 3,823 - - - - - 3,823
Creditors and payables 70 57 - - - - 127

Financial Liabilities

             
NZ-dollar government securities 66,762 - - - - - 66,762
Euro-commercial paper - 180 - - - - 180
Foreign currency debt - 248 317 - - 22 587
Collateral - 1,417 - - - - 1,417
Derivatives in loss 9,487 (6,911) (231) (800) 113 (346) 1,312
Departmental deposits - 15 - 192 - 3 210
IMF allocation - 691 155 616 - 186 1,648
Immigration investor policy bonds 87 - - - - - 87
Other 1 - - - - - 1
Total Financial Liabilities 80,230 (4,303) 241 8 113 (135) 76,154
Net Currency Holdings (46,242) 9 (1) 10 (6) 2 (46,228)

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
As at 30 June 2011 Carrying Value
$m
Fair Value
Measurement
$m
Hierarchy
Level 1
$m
Level 2
$m
Level 3[16]
$m

Cash, Cash Equivalents and Receivables

         
Crown settlement account 13,060 - - - -
Crown trust account 38 - - - -
Foreign cash and cash equivalents 1,461 1,355 - 1,355 -
Debtors and receivables 536 - - - -

Advances

         
RBNZ 2,438 2,438 - 2,438 -
Crown Health Financing Agency 1,750 1,750 - 1,750 -
Housing New Zealand 1,859 1,156 - 1,156 -
New Zealand Railways Corporation 505 505 - 505 -
New Zealand Transport Agency 110 110 - 110 -
Other Crown 4 4 - 4 -
Non-Crown 151 120 - 75 45

Financial Assets

         
Marketable securities 3,242 3,242 2,904 338 -
External deposits 115 115 - 115 -
Derivatives in gain 2,489 2,489 - 2,489 -
IMF financial assets 2,168 - - - -
Total Financial Assets 29,926 13,284 2,904 10,335 45

Overdrafts and Payables

         
Crown disbursement account 3,823 - - - -
Creditors and payables 127 - - - -

Financial Liabilities

         
Treasury bills - market 7,209 604 - 604 -
Treasury bills - non-market 50 - - - -
Government bonds - market 50,755 4,012 4,012 - -
Government bonds - non-market 6,363 - - - -
Inflation-indexed bonds - market 1,633 - - - -
Inflation-indexed bonds - non-market 491 - - - -
Kiwi bonds 261 - - - -
Euro-commercial paper 180 180 - 180 -
Foreign currency debt 587 587 - 587 -
Collateral 1,417 1,417 - 1,417 -
Derivatives in loss 1,312 1,312 - 1,312 -
Departmental deposits 210 210 - 210 -
IMF allocation 1,648 - - - -
Immigration investor policy bonds 87 - - - -
Other 1 - - - -
Total Financial Liabilities 76,154 8,322 4,012 4,310 -

Notes

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