Interest Rate Risk: the risk that profitability in current or future periods will be affected by interest rate movements (on investments and borrowings).
Accounting Risk: where periodic accounting profits can be affected by interest rate movements, this risk is greatest with short term borrowings/investments where renegotiations are frequent
Economic Risk: where changes in interest rates affect the value of the University’s investments and borrowings.
Basis Risk: where interest rate hedging mechanisms are used that do not exactly reflect all characteristics of the underlying exposure being hedged.
Liquidity Risk: the risk that the University, through an unforeseen event or miscalculation, will have insufficient liquidity available at the right time to meet its obligations in an orderly manner.
Day to Day Cash Management: the combination of daily bank account management and effective cash management to ensure funds are available when needed.
Short Term Liquidity Crisis Management: management of liquid assets and available facilities to cover a sudden unforeseen event that severely inhibits the inward cashflow normally expected.
Long Term Going Concern Liquidity Management: the ongoing process of ensuring liquid assets and funding sources are available at all times to meet future long term requirements.
Credit Risk: the risk that the University will suffer a financial loss through the unwillingness or inability of a counterparty to meet its obligations. Credit risk can vary with the type of transaction involved. Investing funds with an organisation creates a credit risk for the full amount of the investment plus interest. However, for a forward interest rate agreement, the exposure is only for potential loss through interest rate movements.
Operational Risk: the risk of financial loss arising from the operational activities of the treasury function eg. staffing, information systems, security.
Financial Arrangement: Interest Rate/Currency Swaps, Futures Contracts, Caps, Floors and Collars, Options and Forward Rate Agreements.
Interest Rate/Currency Swaps: an agreement to exchange a series of cash flows at one interest or exchange rate. It enables the movement from fixed rate to floating rate when interest rates look like falling and vice versa. As a swap does not include the exchange of principal amounts finer pricing can be achieved.
Futures Contracts: an agreement to trade a specified amount of funds through a recognised exchange at a predetermined date in the future at a specified price. It enables short term protection against movements in short term interest rates.
Options: provide the right but not an obligation to borrow or lend at an agreed price, buy or sell a currency at an agreed exchange rate or buy and sell equities at an agreed price on or by a specified date. For this right a premium may be paid.
Caps, Floors, Collars: provide protection, using options, against interest rates and/or currencies rising above a certain level, falling below a certain level or a combination of both.