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NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 June 2004
NOTE 16: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Corporation operates in the domestic and international markets, giving rise to market risks from changes in interest rates and market related credit exposures due to changes in interest and foreign currency rates. Derivative instruments (interest rate and currency swaps, forward rate agreements, futures and options) are used to manage these exposures.
(a) Credit Risk
Credit risk arises from the possibility that the counterparty to a financial instrument will not adhere to the terms of the contract when settlement becomes due.
(i) Credit Exposure to Investments.
The Corporation’s current credit risk policies exclude the investment of funds in entities with a credit rating below A2 short term and A- long term (according to Standard and Poor’s ratings). The total of the Net Fair Value of these investments represents the maximum exposure to credit risk.
(ii) Credit Exposure to Advances
Section 11 of the Tasmanian Public Finance Corporation Act 1985, as amended, states that one of the functions of the Corporation is to provide loans to Participating Authorities as defined in this Act. Major concentrations of credit risk therefore arise from advances to the Tasmanian Government, government business enterprises, state owned companies, local government councils, port corporations and other public entities. The total of the Net Fair Value of these advances represents the maximum exposure to credit risk.
(iii) Credit Exposures of Derivatives
The Corporation’s policy is to deal with Investment Grade counterparties. It is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. Where possible, the Corporation arranges master netting agreements. The credit exposure of currency swaps, interest rate swaps and forward foreign exchange contracts is represented by the Net Fair Value of all contracts with a positive replacement cost, plus an allowance for future potential exposure reduced by the effects of master netting agreements wherever possible. This represents the maximum exposure to credit risk in relation to these derivatives. The Net Fair Values of derivatives are disclosed in note 15.
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