117 / 174
NOTES TO THE FINANCIAL STATEMENTS
(expressed in Eastern Caribbean dollars)
March 31, 2017
Eastern Caribbean Central Bank
Notes to the Financial Statements
March 31, 2017
(expressed in Eastern Caribbean dollars)
39
3. Financial risk management
…
continued
c)
Market Risk
The Bank is exposed to market risk, which is the risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in market prices.
The Bank’s reserve management
mandate permits investment in a number of instruments. The Bank is exposed to general and
specific market movements and volatility of market rates and prices such as interest rates, credit
spreads and foreign exchange rates. The Bank enters into currency forward contracts to manage its
exposure to fluctuations in foreign exchange rates for non-USD securities. The Bank also has a
structured management process which entails the following:
Careful monitoring of the international market and taking positions to achieve objectives
Regular reporting to internal management committees and to the Board of Directors
i)
Interest rate risk
The Bank invests in securities and money market instruments and maintains demand deposit
accounts as a part of its normal course of business. Cash flow interest rate risk is the risk that
the future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will
fluctuate because of changes in market interest rates. Interest rate risk is the risk of loss arising
from changes in prevailing interest rates. The Bank manages this risk by monitoring interest
rates daily, and seeks to minimize the exposure by devising a comprehensive risk assessment
and tolerance strategy known
as “Customised benchmarking”.
The effect of this tool is to
reflect the risk tolerance level of the Bank and to measure the performance of portfolio
managers. The table below analyses the effective interest rates for each class of financial asset
and financial liability:
2017
2016
%
%
Foreign Assets
Money market instruments and money at call
0.82
0.31
Available-for-sale - foreign investment securities
1.55
1.63
Domestic Assets
Balances with local banks
0.00
0.01
Due from local banks
6.50
6.50
Term deposits
2.50
2.50
Loans and receivables -
participating governments’
securities
4.54
5.63
Loans and receivables -
participating governments’ advances
6.50
6.50
Liabilities
Term deposits, call accounts and government operating
accounts
0.27
0.09
Demand and deposit liabilities - foreign
0.28
-
Eastern Caribbean Central Bank
Notes to the Financial Statements
March 31, 2017
(expressed in Eastern Caribbean dollars)
39
3. Financial risk management
…
continued
c)
Market Risk
The Bank is exposed to market risk, which is the risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in market prices.
The Bank’s reserve management
mandate permits investment in a number of instruments. The Bank is exposed to general and
specific market movements and volatility of market rates and prices such as interest rates, credit
spreads and foreign exchange rates. The Bank enters into currency forward contracts to manage its
exposure to fluctuations in foreign exchange rates for non-USD securities. The Bank also has a
structured management process which entails the following:
Careful monitoring of the international market and taking positions to achieve objectives
Regular reporting to internal management committees and to the Board of Directors
i)
Interest rate risk
The Bank invests in securities and money market instruments and maintains demand deposit
accounts as a part of its normal course of business. Cash flow interest rate risk is the risk that
the future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will
fluctuate because of changes in market interest rates. Interest rate risk is the risk of loss arising
from changes in prevailing interest rates. The Bank manages this risk by monitoring interest
rates daily, and seeks to minimize the exposure by devising a comprehensive risk assessment
and tolerance strategy known
as “Customised benchmarking”.
The effect of this tool is to
reflect the risk tolerance level of the Bank and to measure the performance of portfolio
managers. The table below analyses the effective interest rates for each class of financial asset
and financial liability:
2017
2016
%
%
Foreign Assets
Money market instruments and money at call
0.82
0.31
Available-for-sale - foreign investment securities
1.55
1.63
Domestic Assets
Balances with local banks
0.00
0.01
Due from local banks
6.50
6.50
Term deposits
2.50
2.50
Loans and receivables -
participating governments’
securities
4.54
5.63
Loans and receivables -
participating governments’ advances
6.50
6.50
Liabilities
Term deposits, call accounts and government operating
accounts
0.27
0.09
Demand and deposit liabilities - foreign
0.28
-
103
ECCB ANNUAL REPORT 2016/2017
EASTERN CARIBBEAN CENTRAL BANK