Telstra 2008 Annual Report Download - page 177

Telstra Corporation Limited and controlled entities
174
Notes to the Financial Statements (continued)
(a) Risks and mitigation (continued)
Credit risk (continued)
The Telstra Group and the Telstra Entity are also exposed to credit risk
arising from our transactions in money market instruments, forward
foreign currency contracts, cross currency and interest rate swaps.
For credit purposes, there is only a credit risk where the contracting
entity is liable to pay us in the event of a closeout. We have policies
that limit the amount of credit exposure to any financial institution.
These risk limits are regularly monitored. Derivative counterparties
and cash transactions are limited to financial institutions that meet
minimum credit rating criteria in accordance with our policy
requirements. Our credit risk and financial instruments are spread
amongst a number of financial institutions.
One of the methods that we use to manage the risk relating to these
instruments is to monitor our exposure by country of financial
institution based on a value at risk (VaR) methodology. Value at risk
calculations is a technique that estimates the potential losses that
could occur on risk positions in the future as a result of movements in
market rates over a specified time horizon given a specified level of
confidence.
Our credit risk exposure on financial instruments such as money
market transactions, foreign currency contracts, cross currency and
interest rate swap transactions is derived with reference to the current
market value, where it is in-the-money, of the transaction combined
with a potential credit factor which is based on VaR methodology. It
is important to note that the amounts included in Table E below
include the in-the-money market values combined with a potential
credit calculation and will therefore not equate to either the
accounting carrying value or fair value of the transactions as
disclosed in note 18.
In determining the potential credit limit factors to be used in these
calculations, the following should be noted:
• Reference is made to the historical volatility factors relevant to the
particular currencies / interest rates applicable to the instruments;
• In determining the volatility factors, reference has been made to
the holding period or in this case the maturity of the instrument. In
some cases the transaction can have a maturity of up to 10 years
and the potential volatility needs to reflect the possible
movements over this time period given historical observations;
and
• We have used 99% confidence levels to determine the applicable
potential credit limit factors.
The VaR based methodology employed has the following limitations:
• The use of historical data as a proxy for estimating future events
may not cover all potential events, in particular this is relevant
when trying to estimate potential volatility over a long holding
period such as 10 years; and
• The use of a 99% confidence level, by definition, may not take into
account movements that may occur outside of this confidence
threshold.
19. Financial risk management (continued)
Table E Telstra Group Telstra Entity
Credit risk concentrations (VAR based) Credit risk concentrations (VAR based)
As at 30 June 2008 As at 30 June 2007 As at 30 June 2008 As at 30 June 2007
% $m %$m % $m %$m
Australia. . . . . . . . . . . . . . . . 38.6 2,425 36.1 2,239 40.1 2,380 36.9 2,181
United States. . . . . . . . . . . . . 20.1 1,262 23.1 1,432 21.0 1,246 24.1 1,421
Japan . . . . . . . . . . . . . . . . . 2.0 125 2.6 160 2.1 124 2.7 159
Europe . . . . . . . . . . . . . . . . . 16.6 1,042 19.9 1,231 17.6 1,042 20.9 1,231
United Kingdom . . . . . . . . . . . 11.1 696 7.9 487 11.5 680 8.0 470
Canada. . . . . . . . . . . . . . . . . 1.2 78 1.7 106 1.3 78 1.8 106
Switzerland. . . . . . . . . . . . . . 4.0 251 5.3 328 4.2 251 5.6 328
China / Hong Kong. . . . . . . . . . 6.0 380 2.9 181 2.2 131 --
Singapore . . . . . . . . . . . . . . . 0.1 6-- - - --
New Zealand . . . . . . . . . . . . . 0.3 22 0.5 30 - - --
100.0 6,287 100.0 6,194 100.0 5,932 100.0 5,896