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Annual Report 2003/2004 Northern Territory Treasury Corporation



Annual Report 2003/2004 Northern Territory Treasury Corporation

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Tabled paper 1547


Tabled Papers for 9th Assembly 2001 - 2005; Tabled Papers; ParliamentNT






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NOTES TO THE FINANCIAL STATEMENTS FORTHE FINANCIAL YEAR ENDED 30 JUNE 2004 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Corporation uses a variety of derivative financial instruments in the normal course of business in order to manage its exposure to interest rate and foreign exchange rate risk including: interest rate swaps to mitigate the risk of rising interest rates; forward start interest rate swap contracts to manage interest rate risk; and cross currency swaps to manage the foreign currency risk associated with foreign currency denominated borrowings. The Corporation does not enter into or trade in derivative financial instruments for revenue speculative purposes. (a) Interest Rate Risk Interest rate risk is the risk of financial loss and/or increased costs due to adverse movements in the values of assets and liabilities as a result of changes in interest rates. The Corporation's interest rate risk arises from cash flow mismatches in the maturity profiles and repricing dates of its assets and liabilities. The Corporation aims to manage the interest rate exposure on its assets and liabilities at an acceptable level in an attempt to minimise the cost of its borrowing requirements within stated guidelines. The Corporation's interest rate risk on its financial assets and liabilities are significantly extinguished as a result of its relationship with the Northern Territory of Australia. As at 30 June 2004, approximately 82 per cent ofthe Corporation's issued debt is on-lent to the Northern Territory of Australia. The interest rates and maturity dates set on these loans are closely matched to the debt issued by the Corporation to external counterparties. The Corporation's loans to the Northern Territory of Australia attract a margin over the cost of servicing the debt. The Corporation uses domestic interest rate swaps and forward start interest rate swaps to manage interest rate risk. ( i ) Interest Rate Swaps: By using interest rate swaps, the Corporation agrees to exchange the difference between fixed and floating interest rate amounts calculated by reference to agreed notional principal amounts, thereby, enabling the Corporation to reduce the risk of rising interest rates. The Corporation enters into interest rate swaps that entitle it to receive interest at floating rates on notional principal amounts and oblige it to pay interest at fixed rates on the same amount. The interest rate swaps allow the Corporation to raise long-term borrowings at floating rates and effectively swap them into fixed rates. The interest rate swaps currently in place cover approximately 100 percent of the floating rate notes outstanding and are scheduled to expire as each borrowing matures. Wherever possible cashflows match and coincide. Notional principal amounts represent the contract or face value ofthe swap. The notional amounts do not represent amounts exchanged by the parties to the contract. 56 Northern TerritoryTreasury Corporation

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