NOTES TO FINANCIAL STATEMENTS

NOTE 2: Investment Risk


The relative risk associated with the University's financial assets is detailed below.

Cash: All cash of the University is maintained in accounts that are collateralized in accordance with the Virginia Security for Public Deposits Act, Section 2.1-359, et.seq., of the Code of Virginia.

Investments: The investment policy goals, objectives, and guidelines are established by the Finance Committee of the Board. The University's cash equivalents and investments are categorized by levels of credit risk as described below:

Category 1 -- Insured or registered securities or securities held by the University of Virginia or its agent in the University's name.

Category 2 -- Uninsured and unregistered, with securities held by the counterparty's trust department or agent in the University of Virginia's name. None of the University's investments are classified as category 2 investments.

Category 3 -- Uninsured and unregistered, with securities held by the counterparty, or by its trust department or agent but not in the University of Virginia's name. None of the University's investments are classified as category 3 investments.

The University of Virginia, through its agent, Fiduciary Trust Company International, lends securities to various brokers on a temporary basis for a fee. All security loan agreements are collateralized by cash, U.S. Government obligations, or irrevocable letters of credit issued by major banks having a market value equal to at least 102 percent of the market value of the loaned securities. Securities on loan at June 30, 1997 and 1996 are presented as non-categorized in the schedule of custodial credit risk. All security loans can be terminated on demand by either the University or the borrower and the average term of the loans is less than one week. This maturity is matched with the term to maturity of the investment of the cash collateral by investing in overnight repurchase agreements, in the agent's money market investment pool, or in the University's short-term investment pool.

The University uses, through its investments and through investments in pooled funds, a variety of derivative securities including futures, options, and forward foreign currency contracts. These financial instruments are used to modify market risk exposure. Futures contracts and options on futures contracts are traded on organized exchanges and require collateral or margin in the form of cash or marketable securities. The net change in the futures contract value is settled with a cash transaction on a daily basis. Holders of futures contracts look to the exchange for performance under the contract and not the entity holding the offsetting futures position. Accordingly, the amount of risk due to non-performance of counterparties to the futures contracts is minimal. Foreign exchange contracts are used to protect the University's portfolio against fluctuations in the values of foreign currencies. The credit risk of forward currency contracts traded over-the-counter lies with the counterparty. Asset swap contracts are privately negotiated agreements between two participants to exchange the return stream derived from their assets to each other without exchanging underlying assets. The University uses asset swaps to gain exposure to certain market sectors in lieu of direct investment. The credit risk lies with the intermediary who arranges the asset swap. As of June 30, 1997, the market value of the University's derivative exposure consisted of $268,000 in commitments to purchase futures contracts, $46,435,000 in commitments to sell futures contracts, $4,189,000 in commitments to purchase options and warrants, $605,000 in commitments to sell options and warrants, $237,000 in commitments to purchase fixed income derivatives, $5,846,000 in commitments to purchase forward foreign exchange contracts, $11,183,000 in commitments to sell forward foreign exchange contracts, $1,856,000 in commitments to purchase asset swap contracts, and $3,354,000 in commitments to sell asset swap contracts.

Categorization of investment risk for assets held as of June 30, 1997 (in thousands)

Category 1

Non-Categorized

Cost

Market Value

U.S. Government Securities

$ 201,369

$ 109,572

$ 310,941

$ 310,982

Corporate Bonds

35,161

--

35,161

45,025

Corporate Notes

18,187

--

18,187

18,640

Common and Preferred Stocks

234,432

87,629

322,061

545,130

Municipal Securities

562

--

562

621

International Bonds and Notes

17,290

--

17,290

17,445

Repurchase Agreements

262,449

--

262,449

262,449

Mutual and Money Market Funds

--

151,772

151,772

169,516

Real Estate and Other Tangible Property

--

398

398

1,287

Mortgages

--

8,404

8,404

8,404

Other Intangible Property

--

86,580

86,580

85,139

Total

$ 769,450

$ 444,355

$ 1,213,805

$ 1,464,638

Categorization of investment risk for assets held as of June 30, 1996 (in thousands)

U.S. Government Securities

$ 314,178

$ 4,084

$ 318,262

$ 316,000

Corporate Bonds

25,621

--

25,621

34,454

Corporate Notes

23,607

--

23,607

23,351

Common and Preferred Stocks

114,823

93,943

208,766

335,592

Municipal Securities

266

--

266

319

International Bonds and Notes

4,679

--

4,679

4,685

Repurchase Agreements

93,268

--

93,268

93,268

Mutual and Money Market Funds

--

93,835

93,835

118,946

Real Estate and Other Tangible Property

--

398

398

398

Mortgages

--

9,774

9,774

9,774

Other Intangible Property

--

212,069

212,069

244,125

Total

$ 576,442

$ 414,103

$ 990,545

$ 1,180,912


Notes to Financial Statements | Note 1 | Note 2 | Note 3 | Note 4 | Note 5 | Note 6 | Note 7 | Note 8 | Note 9 | Note 10 | Note 11 | Note 12 | Note 13


President's Report 1996-97 Contents

Financial Report 1996-1997