17 Financial Instrument Risks

The Department is party to financial instrument arrangements (and exposure to credit, interest rate and currency risks) as part of our everyday operations. These include instruments such as bank balances, short-term deposits, accounts receivable, accounts payable, and forward foreign exchange contracts.

Credit risk

Credit risk is the risk that a third party will default on its obligations to the Department, causing the Department to incur a loss. In the normal course of our business, the Department incurs credit risk from trade debtors and transactions with financial institutions.

The Department does not require any collateral or security to support financial instruments with financial institutions that we deal with, as these entities have high credit ratings. For our other financial instruments, the Department does not have significant concentrations of credit risk.

At balance sheet date, there were no significant other concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the Statement of Financial Position.

Fair value

The fair value of all financial instruments is equivalent to the carrying amount disclosed in the Statement of Financial Position.

Foreign currency risk

Currency risk is the risk that receivables and payables due in foreign currency will fluctuate in value because of changes in foreign exchange rates.

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. This could impact on the return on investments or the cost of borrowing. Under section 46 of the Public Finance Act, the Department cannot raise a loan without ministerial approval and no such loans have been raised. Accordingly, there is no interest rate exposure on funds borrowed.

The Department has no significant exposure to interest rate risk on our financial instruments.

Liquidity risk

Liquidity risk arises from situations in which a party interested in trading an asset cannot do so because nobody in the market wants to trade that asset. Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade.

The Department has no significant exposure to liquidity risk on our financial instruments.