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, 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 2012 NZD
$m		 USD
$m		 Yen
$m		 Euro
$m		 AUD
$m		 Other
$m		 Carrying
Value
$m

Cash, Cash Equivalents and Receivables
Crown settlement account 9,060 - - - - - 9,060
Crown trust account 33 - - - - - 33
Foreign cash and cash equivalents - 899 1 10 15 52 977
Debtors and receivables 233 - - - - - 233

Advances
RBNZ - 1,418 - 740 - - 2,158
Crown Health Financing Agency 2,202 - - - - - 2,202
Housing New Zealand 1,861 - - - - - 1,861
New Zealand Railways Corporation 510 - - - - - 510
New Zealand Transport Agency 130 - - - - - 130
Other Crown 4 - - - - - 4
Non-Crown 125 - - - - - 125

Financial Assets
Marketable securities 1,445 2,572 270 - 421 - 4,708
External deposits 130 - - - - - 130
Derivatives in gain 8,348 (4,624) 356 (1,810) (179) (409) 1,682
IMF financial assets 8 939 211 838 - 253 2,249
Total Financial Assets 24,089 1,204 838 (222) 257 (104) 26,062

Overdrafts and Payables
Crown disbursement account 4,418 - - - - - 4,418
Creditors and payables 141 - 142 - - - 283

Financial Liabilities
NZ-dollar government securities 74,520 - - - - - 74,520
Euro-commercial paper - - - - - - -
Foreign currency debt - 124 171 - - 12 307
Collateral - 1,067 - - - - 1,067
Derivatives in loss 1,995 (715) 374 (975) 277 (318) 638
Departmental deposits - 24 - 127 - 4 155
IMF allocation - 686 154 613 - 185 1,638
Immigration investor policy bonds 52 - - - - - 52
Other 42 - - - - - 42
Total Financial Liabilities 81,168 1,186 841 (235) 277 (117) 83,120
Net Currency Holdings (57,079) 18 (3) 13 (20) 13 (57,058)

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 IFRS 7, 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 2012 Carrying
Value
$m		 Fair Value
Measurement
$m		 Level 1
$m 		Level 2
$m 		Level 3[14]
$m

Cash, Cash Equivalents and Receivables
Crown settlement account 9,060 - - - -
Crown trust account 33 - - - -
Foreign cash and cash equivalents 977 898 - 898 -
Debtors and receivables 233 - - - -

Advances
RBNZ 2,158 2,158 - 2,158 -
Crown Health Financing Agency 2,202 2,180 - 2,180 -
Housing New Zealand 1,861 1,334 - 1,334 -
New Zealand Railways Corporation 510 510 - 510 -
New Zealand Transport Agency 130 130 - 130 -
Other Crown 4 4 - 4 -
Non-Crown 125 107 - - 107

Financial Assets
Marketable securities 4,708 4,708 4,335 373 -
External deposits 130 130 - 130 -
Derivatives in gain 1,682 1,682 - 1,682 -
IMF financial assets 2,249 - - - -
Total Financial Assets 26,062 13,841 4,335 9,399 107

Overdrafts and Payables
Crown disbursement account 4,418 - - - -
Creditors and payables 283 - - - -

Financial Liabilities
Treasury bills - market 9,516 397 - 397 -
Treasury bills - non-market 479 - - - -
Government bonds - market 57,925 3,210 3,210 - -
Government bonds - non-market 4,424 - - - -
Inflation-indexed bonds - market 1,631 - - - -
Inflation-indexed bonds - non-market 316 - - - -
Kiwi bonds 229 - - - -
Euro-commercial paper - - - - -
Foreign currency debt 307 307 - 307 -
Collateral 1,067 1,067 1,067 -
Derivatives in loss 638 638 - 638 -
Departmental deposits 155 155 - 155 -
IMF allocation 1,638 - - - -
Immigration investor policy bonds 52 - - - -
Other 42 41 - 41 -
Total Financial Liabilities 83,120 5,815 3,210 2,605 -

Notes

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