Interest rate risk
Interest rate risk is the deviation from the long-term expected costs caused by interest rate changes. Concerning interest rate risk, the strategic target of the government has been expressed in the form of a benchmark portfolio since the beginning of 2005. The benchmark portfolio also enables the government to evaluate the performance of operative debt management carried out in the State Treasury.
The primary principle of interest risk management is to differentiate interest risk management implemented mainly through derivative instruments from funding. The selected benchmark portfolio reflects the target interest risk profile of the debt, which at the chosen risk level is intended to minimise the anticipated borrowing cost in the long term. The function of portfolio management is to control the interest risk of the actual debt within risk limits set relative to the benchmark portfolio. Divergence through active measures from the benchmark portfolio interest risk position is based on a market view aimed at achieving a better financial result than that of the benchmark portfolio.
Derivatives are used in portfolio management to modify the debt portfolio interest rate risk position. The debt interest risk status means the average repricing term of the debt portfolio.
Exchange rate risk
Exchange rate risk stems from the economic loss caused by exchange rate changes. The central government takes no exchange rate risk in its new debt management operations. Foreign exchange rate risk is totally eliminated by derivatives. This implies that all central government debt is euro-denominated.