Reserve Bank of Australia Annual Report 2011

Change in profit/equity due to a 10 per cent appreciation
in the reserves-weighted value of the A$ –3 258 –3 804
Change in profit/equity due to a 10 per cent depreciation
in the reserves-weighted value of the A$ 3 982 4 650
2011
$M
2010
$M
Interest rate risk
Interest rate risk is the risk that the fair value or cash flows of financial instruments will fluctuate because
of movements in market interest rates. The RBA’s balance sheet is exposed to considerable interest rate risk
because most of its assets are financial assets, such as domestic and foreign securities, which have a fixed
income stream. The price of such securities increases when market interest rates decline, while the price of
a security will fall if market rates rise. Interest rate risk increases with the maturity of a security because the
associated income stream is fixed for a longer period.
Sensitivity to interest rate risk
The figures below show the effect on the RBA’s profit and equity of a movement of +/–1 percentage point in
interest rates, given the level, composition and modified duration of the RBA’s foreign currency and Australian
dollar securities as at 30 June. The valuation effects shown are generally reflective of the RBA’s exposure over
the financial year.
2011
$M
2010
$M
Change in profit/equity due to movements of
+/–1 percentage point across yield curves:
Foreign currency securities –/+456 –/+568
Australian dollar securities –/+169 –/+158
A rise in interest rates would be associated with a valuation loss; a fall in interest rates would be associated with
a valuation gain.
Other price risk
The RBA holds shares as a member of the Bank for International Settlements. This membership is mainly
to maintain and develop strong relationships with other central banks which are to Australia’s advantage.
Shares in the BIS are owned exclusively by its member central banks and monetary authorities. For accounting
purposes, the RBA treats BIS shares as ‘available for sale’ and the fair value of these shares is estimated on the
basis of the BIS’ net asset value, less a discount of 30 per cent. Accordingly, these shares are revalued to reflect
movements in the net asset value of the BIS and in the Australian dollar. The price risk faced on BIS shares is
incidental to the policy reasons for holding them and is immaterial compared with other market risks faced
by the RBA. For this reason, this exposure is not included as part of the RBA’s net foreign currency exposure
outlined above.
Annual report 2011 | notes to the financial statements
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