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.

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. At June 30, 1995, the market value of the securities on loan was $15,231,000 and the collateral value was $15,885,000. At June 30, 1994, the market value of the securities on loan was $53,157,000 and the collateral value was $55,499,000.


Categorization of investment risk for assets held as of June 30, 1995 (in thousands):
Description Category 1 Category 3 Non-Categorized Cost Market Value
U.S. Government Securities $ 249,479 $ -- $ -- $ 249,479 $ 251,845
Corporate Bonds 16,399 -- -- 16,399 17,645
Corporate Notes 23,522 -- -- 23,522 23,740
Common and Preferred Stocks 225,577 -- -- 225,577 330,362
Municipal Securities 288 -- -- 288 353
International Bonds and Notes 18,183 -- -- 18,183 18,025
Repurchase Agreements 18,644 -- -- 18,644 18,644
Mutual and Money Market Funds -- -- 114,365 114,365 130,117
Real Estate and Other Tangible Property -- -- 398 398 398
Mortgages -- -- 10,851 10,851 10,851
Other Intangible Property -- -- 146,185 146,185 160,057
Total $ 552,092 $ -- $ 271,799 $ 823,891 $ 962,037


Categorization of investment risk for assets held as of June 30, 1994 (in thousands):
Description Category 1Category 3 Non-CategorizedCostMarket Value
U.S. Government Securities $265,245 $ 405 $  -- $265,650 $262,264
Corporate Bonds 14,081 50 -- 14,131 14,899
Corporate Notes 27,770 -- -- 27,770 26,427
Common and Preferred Stocks 223,445 -- -- 223,445 280,066
Municipal Securities -- 275 -- 275 332
International Bonds and Notes 17,587 -- -- 17,587 16,752
Repurchase Agreements 7,515 -- -- 7,515 7,515
Mutual and Money Market Funds -- -- 111,278 111,278 127,829
Real Estate and Other Tangible Property -- -- 403 403 403
Mortgages -- -- 11,553 11,553 11,553
Other Intangible Property -- -- 93,227 93,227 99,115
Total $555,643 $ 730 $216,461 $772,834 $847,155

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. As of June 30, 1995, the market value of the University's derivative exposure consisted of $32,183,000 in commitments to sell futures contracts, $2,746,000 in commitments to purchase futures contracts, $1,474,000 in options and warrants, $390,000 in fixed income derivatives, $35,181,000 in commitments to sell forward foreign exchange contracts, and $6,590,000 in commitments to purchase forward foreign exchange contracts.




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