ECCB 2016/2017 Annual Report

ECCB ANNUAL REPORT 2016/2017

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(expressed in Eastern Caribbean dollars) Eastern Caribbean Central Bank Notes to the Financial Statements March 31, 2017 (expressed in Eastern Caribbean dollars) 3. Financial risk management … continued c) Market Risk Eastern Caribbean Central Bank Notes to the Financial Statements March 31, 2017 (expressed in Eastern Caribbean dollars) 3. Financial risk management … continued c) Market Risk

NOTES TO THE FINANCIAL STATEMENTS EASTERN CARIBBEAN CENTRAL BANK

March 31, 2017

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 - 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 -

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