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Guidelines for the Management of Crown and Departmental Foreign Exchange Exposure

4.  Identification and Timing of Cover

Guideline 4

The policy document must state the point or points at which identification and covering of transaction exposure will occur.  Where more than one identification point is stated, the policy should define the circumstances under which each is applicable.

Definition

  1. The identification of transaction exposure entails highlighting those cash flows, the New Zealand-dollar value of which could be affected by movements in exchange rates. The cash flows may be direct or indirect (as explained in paragraph 8 of these guidelines).

  2. The timing of cover appropriate to each department is dependent on the nature of the department’s activities. Departments will prepare budgets based on assumed exchange rates. As there is a delay between the preparation of budgets, the approval of appropriations and the conclusion of contracts, departments could potentially face a material transaction exposure before the contract date.

Policy

  1. The point at which a transaction exposure is considered certain to arise is the point at which the exposure should be covered. The latest point at which an exposure may be covered is at the contract stage, when an agreement with a supplier or purchaser has been concluded.

  2. In certain circumstances it may be appropriate to cover transaction exposure prior to the contract stage. This may be undertaken at the following points:

    1. at the budget stage where:

      • a department’s budget has been prepared and signed by the Responsible Minister for inclusion in the budget cycle;

      • a financial authority exists; or

      • the Chief Executive has reasonable grounds for believing that the budget (or the relevant portion thereof) will be approved and can specify the currencies, amounts and timing of the foreign-exchange flows involved;

    2. or at the appropriation stage where:

      • a department’s appropriation and the associated imprest supply has been approved by Cabinet or a Cabinet Committee; and

      • the Chief Executive can specify the currencies, amounts and timing of the foreign-exchange flows required to produce the agreed outputs.

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