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.

Collateral held for securities lending transactions represents the University's allocated share of cash collateral received and reinvested and securities received for the State Treasury's securities lending program. Information related to the credit risk of these investments and the State Treasury's securities lending program is available on a statewide level in the Commonwealth of Virginia's Comprehensive Annual Financial Report.

The University from time to time may use, 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, if any, 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 æuctuations 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, 1999, the market value of the University's derivative exposure consisted of $497,000 in commitments to purchase futures contracts, $3,177,000 in commitments to sell futures contracts, $1,804,000 in commitments to purchase options and warrants, $412,000 in commitments to sell options and warrants, $475,000 in commitments to purchase forward foreign exchange contracts, $256,000 in commitments to sell forward foreign exchange contracts, and $1,346,000 in commitments to purchase asset swap contracts.

 Categorization of Investment risk for assets held as of June 30, 1999 (in thousands)

Category 1

Non-Categorized

Cost

Market Value

U.S. Government Securities

$ 404,292

$ --

$ 404,292

$ 397,174

Corporate Bonds

75,128

--

75,128

74,208

Corporate Notes

8,545

--

8,545

8,334

Common and Preferred Stocks

240,465

--

240,465

339,288

Municipal Securities

373

--

373

378

Mutual and Money Market Funds

--

425,061

425,061

429,353

Real Estate and Other Tangible Property

--

398

398

1,280

Mortgages

--

4,198

4,198

4,198

Private Placement Investments

--

272,814

272,814

399,580

Other Intangible Property

--

1,843

1,843

1,843

Total

$ 728,803

$ 704,314

$ 1,433,117

$ 1,655,636

Categorization of Investment risk for assets held as of June 30, 1998 (in thousands)

Category 1

Non-Categorized

Cost

Market Value

U.S. Government Securities

$ 209,995

$ 199,131

$ 409,126

$ 415,613

Corporate Bonds

41,650

--

41,650

43,460

Corporate Notes

31,109

--

31,109

31,190

Common and Preferred Stocks

200,336

57,380

257,716

456,385

Municipal Securities

366

--

366

384

International Bonds and Notes

17,439

--

17,439

16,965

Repurchase Agreements

289,872

--

289,872

289,872

Mutual and Money Market Funds

--

142,114

142,114

138,881

Real Estate and Other Tangible Property

--

398

398

1,280

Mortgages

--

5,721

5,721

5,721

Private Placement Investments

--

232,571

232,571

286,197

Other Intangible Property

--

3,839

3,839

3,561

Total

$ 790,767

$ 641,154

$ 1,431,921

$ 1,689,509


Notes

Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

Notes 7 - 14