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)
|
|
