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