Interest rate risk
In the government’s interest rate risk management, interest rate risk is defined as the negative deviation from the long-term expected costs caused by interest rate changes. Concerning interest rate risk, the strategic target of the government is expressed in the form of a benchmark portfolio. The State Treasury is allowed to deviate from the benchmark’s risk profile within the limits set in the guidelines of the Ministry of Finance. The benchmark portfolio also enables the government to evaluate the performance of operative debt management.
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 aim of the State Treasury’s 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’s interest rate risk position. The interest rate risk position is defined in terms of the average time to refixing 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 eliminated by using derivatives. Thus, the total central government debt is euro-denominated on an after-swap basis.