Comprehensive Annual Financial Report - Minnesota State ...

Notes
34
(Continued)
D erivative financial
instruments
that SBI enters into
include futures,
options, stock warrants
and rights, currency
forwards, and
synthetic guaranteed
investment contracts.
Public Employees
Retirement Association
of Minnesota
6. Derivative Financial Instruments
On behalf of PERA, SBI invests in various
types of derivative financial instruments.
Derivatives are defined as any financial
arrangement between two parties that has
value based on or derived from future
price fluctuations. The derivative financial
instruments that SBI enters into include
futures, options, stock warrants and rights,
currency forwards, and synthetic guaranteed
investment contracts.
Minnesota Statutes, Section 11A.24, provides
that any agreement for put and call
options and futures contracts may only be
entered into with a fully offsetting amount
of cash or securities. This applies to foreign
currency forward contracts used to
offset the currency risk of a security. All
other derivatives are exchange-traded. The
purpose of the SBI’s derivative activity is to
equitize cash in the portfolio, to adjust the
duration of the portfolio, or to off-set current
futures positions.
Explanations of each derivative instrument
type are presented below. The fair value
balances and notational amounts (or face
value) at June 30, 2012, classified by derivative
instrument type (e.g., futures, options,
currency forwards, and stock warrants and
rights), and the changes in fair value for fiscal
year 2012 are shown in Figure 5.
å Futures — Futures are contract commitments
to purchase (asset) or sell
(liability) at a future date. The net
change in the values of futures contracts
is settled on a regular basis and
gains and losses are included in investment
income.
Fig. 6 Capital Assets (in thousands)
å Options — Options are contracts that give
buyers or sellers the right to buy (calls) or
sell (puts) a security at a predetermined
price on a future date. Gains and losses
result from variances in the market value
of the security that is the subject of the
contract that occur prior to or on the contract
specified date. The gains and losses
are included in investment income.
å Currency Forward Contracts — Foreign
currency forward contracts are used to
manage portfolio foreign currency risk.
The provisions of the contract vary based
on what is negotiated between the two
parties to the contract.
å Stock Warrants and Rights — Stock warrants,
similar to options, are the right to
purchase shares of a stock at a certain
price by a certain date. They usually have
a longer term before expiration, e.g. five
years or more. When exercised, new
shares are issued by the company. Rights
are the same but are issued to current
stock owners to enable them to retain
their relative ownership share. Gains and
losses from the sale or exercise of stock
warrants and rights are included in investment
income.
SBI maintains a fully benefit-responsive synthetic
guaranteed investment contract for
the Supplemental Investment Fund - Fixed
Interest Account. The investment objective
of the Fixed Interest Account is to protect
investors from loss of their original investment
and to provide a competitive interest
rate. On June 30, 2012, SBI’s portfolio of
well diversified high quality investment grade
fixed income securities had a fair value of
$1,163,387,817 that is $57,495,440 in excess
Balance Balance
July 1, 2011 Additions Deductions June 30, 2012
Capital assets, not being depreciated:
Land $ 170 $ 170
Capital assets, being depreciated:
Building $ 11,218 $ 0 $0 $ 11,218
Equipment, Furniture & Fixtures 1,535 0 (541) 994
Total capital assets $12,753 $ 0 $(541) $12,212
being depreciated
Less accumulated depreciation for:
Building $ (2,805) $ (287) $0 $ (3,092)
Equipment, Furniture & Fixtures (1,102) (74) 541 (635)
Total accumulated depreciation $ (3,907) $(361) $541 $(3,727)
Total capital assets,
net of accumulated depreciation $ 9,016 $(361) $0 $ 8,655