Notes to Financial Statements

As of June 30, 1998

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.

Under authorization of the Board of Visitors, the University ofVirginia, through its agent, Fiduciary Trust Company International, lends U.S. Government and equity securities to various broker-dealers on a temporary basis for cash, which is then reinvested. All security loan agreements are collateralized by cash totaling at least 102 percent of the market value of the loaned securities. Securities on loan at June 30, 1998 and 1997 are presented as non-categorized in the schedule of custodial credit risk. All security loans can be terminated on demand by either the University or the borrower and the average term of the loans is less than one week. This maturity is matched with the term to maturity of the investment of the cash collateral by investing the majority in overnight repurchase agreements while a small percentage is loaned to the Real Estate Foundation. Securities loaned as of June 30, 1998 had a carrying value of $259,391,000 and a market value of $307,397,000. Cash collateral received totaled $319,233,000. As such, the University has no assumed credit risk.

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 fiuctuations 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, 1998, the market value of the University's derivative exposure consisted of $50,326,000 in commitments to sell futures contracts, $204,000 in commitments to purchase options and warrants, $1,017,000 in commitments to sell options and warrants, $467,000 in commitments to purchase forward foreign exchange contracts, $7,970,000 in commitments to sell forward foreign exchange contracts, $3,070,000 in commitments to purchase asset swap contracts, and $2,838,000 in commitments to sell asset swap contracts.


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

Other Intangible Property -

--

236,410

236,410

289,758

Total

$ 790,767

$ 641,154

$ 1,431,921

$ 1,689,509


Categorization of Investment risk for assets held as of June 30, 1997 (in thousands)

Category 1

Non-Categorized

Cost

Market Value

U.S. Government Securities

$ 201,369

$ 109,572

$ 310,941

$ 310,982

Corporate Bonds

35,161

--

35,161

45,025

Corporate Notes

18,187

--

18,187

18,640

Common and Preferred Stocks

234,432

87,629

322,061

545,130

Municipal Securities

562

--

562

621

International Bonds and Notes

17,290

--

17,290

17,445

Repurchase Agreements

262,449

--

262,449

262,449

Mutual and Money Market Funds

--

151,772

151,772

169,516

Real Estate and Other Tangible Property

--

398

398

1,287

Mortgages

--

8,404

8,404

8,404

Other Intangible Property

--

86,580

86,580

85,139

Total

$ 769,450

$ 444,355

$ 1,213,805

$ 1,464,638


Note 1

Note 2

Note 3

Note 4

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Note 12

Note 13

Note 14

Financial Report

Notes