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Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

Notes 7 - 14


NOTE 2


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.


CATEGORIZATION OF INVESTMENT RISK FOR ASSETS HELD AS OF JUNE 30, 2000 (in thousands)

 
Category 1
Non-categorized
Fair Value
Cost

U.S. Government Securities

$ 514,072

$ --

$ 514,072

$ 524,242

Corporate Bonds

87,288

--

87,288

92,835

Corporate Notes

20,085

--

20,085

20,428

Common and Preferred Stocks

424,813

--

424,813

289,803

Municipal Securities

318

--

318

322

Mutual and Money Market Funds

--

519,074

519,074

473,016

Real Estate and Other Tangible Property

--

37

37

27

Mortgages

--

3,397

3,397

3,397

Private Placement Investments

--

609,847

609,847

331,629

Other Intangible Property

--

7,677

7,677

7,677

TOTAL

$1,046,576

$1,140,032

$ 2,186,608

$ 1,743,376


CATEGORIZATION OF INVESTMENT RISK FOR ASSETS HElD AS OF JUNE 30, 1999 (in thousands)

 
Category 1
Non-categorized
Fair Value
Cost

U.S. Government Securities

$ 397,174

$ --

$ 397,174

$ 404,292

Corporate Bonds

74,208

--

74,208

75,128

Corporate Notes

8,334

--

8,334

8,545

Common and Preferred Stocks

339,288

--

339,288

240,465

Municipal Securities

378

--

378

373

Mutual and Money Market Funds

--

429,353

429,353

425,061

Real Estate and Other Tangible Property

--

1,280

1,280

398

Mortgages

--

4,198

4,198

4,198

Private Placement Investments

--

399,580

399,580

272,814

Other Intangible Property

--

1,843

1,843

1,843

TOTAL

$ 819,382

$836,254

$ 1,655,636

$ 1,433,117

Derivative Financial Instruments: Derivative instruments are financial contracts whose values depend on the values of one or more underlying assets, reference rates, or financial indexes. A derivative instrument generally has one or more underlying investment, requires little or no initial net investment, and requires or permits a net settlement. In addition, some traditional securities can have derivative--like characteristics. Examples of common derivatives include, but are not limited to, futures, forwards, options or swap contracts. Although the contract or notional amount of the derivative is not recorded on the financial statements, all derivative instruments are recognized as either an asset or a liability depending on the rights or obligations of the contract measured at fair value.

The University has exposure, both directly and indirectly, to various derivative financial instruments that are used in the normal course of business to enhance returns on investments and manage risk exposure to changes in value due to fluctuations in market conditions. These investments may involve, to varying degrees, elements of credit and market risk in excess of amounts recognized on the financial statements. Credit risk is the possibility that losses may occur from the failure of a counterparty to perform according to the terms of the agreement. The University minimizes the credit (or repayment) risk in its direct derivative instrument by entering into transactions with high quality counterparties and a legally enforceable master netting agreement. The "net" mark to market exposure represents the netting of the positive and negative exposures with the same counterparty. Market risk arises due to adverse changes in market price, interest rate and foreign exchange rate fluctuations that may result in a decrease in the market value of a financial investment and/or increases, in its funding cost. The University manages market risk by establishing and monitoring limits as to the type and degree of risk that may be undertaken.

Fair Value Hedge: The University has directly entered into a fair value hedge to manage returns on a portion of its endowment investments having limited liquidity. The University's fair value hedge is subject to a master netting agreement. An assessment of the effectiveness of the fair value hedge is performed at least monthly and has been highly effective in offsetting changes in fair value of the hedged items since inception.

In order to secure its obligations under the derivative instrument agreement, the counter-party required the ability to retain a perfected security interest in collateral provided from the University's endowment assets. The agreement requires the University to maintain collateral in cash or margin eligible securities in acceptable value equivalent to the greater of $73,000,000 or the University's obligation, if any, under the agreement. At June 30, 2000, the University has made available to the counter-party more than sufficient collateral in the form of $137,065,000 of US government securities and $591,000 of cash. The collateral is maintained with the University's custodian in a segregated account.

Summary of the University's outstanding derivatives at June 30, 2000 and 1999 (in thousands):

 
June 30, 2000
June 30, 1999
 
Notional
Fair Value
Notional
Fair Value
Direct Derivative Exposure
       
         
Fair Value Hedge
$196,519
$63,797
--
--
         
Indirect Derivative Exposures
       
         
Not Used for Hedging
10,503
8,360
7,524
(889)
Cash Flow Hedge
12,600
--
29,326
174
Foreign Currency Hedge
12,371
(68)
4,048
101
         
TOTAL EXPOSURES
$231,993
$72,089
$40,898
$(614)

Financial Notes Home

Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

Notes 7 - 14


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