FirstChoice Wholesale Investments - Colonial First State

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COLONIAL FIRST STATE - FIRSTCHOICE WHOLESALE INVESTMENT FUNDS11. DERIVATIVE FINANCIAL INSTRUMENTSNOTES TO THE FINANCIAL STATEMENTSFOR THE PERIOD ENDED 30 JUNE 2011In the normal course of business certain Funds enter into transactions in various derivative financial instruments whichhave certain risks. A derivative is a financial instrument or other contract which is settled at a future date and whose valuechanges in response to the change in a specified interest rate, financial instrument price, commodity price, foreignexchange rate, index of prices or rates, credit rating or credit index or other variable. Further details around the derivativefinancial instruments used by FirstChoice Wholesale Global Share - Hedged is disclosed in Note 14.Derivative financial instruments require no initial net investment or an initial net investment that is smaller than would berequired for other types of contracts that would be expected to have a similar response to changes in market factors.Derivative transactions include many different instruments such as forwards, futures and options. Derivatives areconsidered to be part of the investment process and the use of derivatives is an essential part of these Funds' portfoliomanagement. Derivatives are not managed in isolation. Consequently, the use of derivatives is multifaceted and includes:- hedging to protect an asset or liability of these Funds against a fluctuation in market values or to reduce volatility- a substitution for trading of physical securities- adjusting asset exposures within the parameters set in the investment strategy, and adjusting the duration of fixedinterest portfolios or the weighted average maturity of cash portfolios.While derivatives are used for trading purposes, they are not used to gear (leverage) a portfolio. Gearing a portfolio wouldoccur if the level of exposure to the markets exceeds the underlying value of these Funds.Certain Funds hold the following derivative instruments:(a)FuturesFutures are contractual obligations to buy or sell financial instruments on a future date at a specified price established inan organised market. The futures contracts are collateralised by cash or marketable securities. Changes in futurescontracts' values are usually settled net daily with the exchange. Interest rate futures are contractual obligations to receiveor pay a net amount based on changes in interest rates at a future date at a specified price, established in an organisedmarket.(b)Forward currency contractsForward currency contracts are primarily used by certain Funds to hedge against foreign currency exchange rate risks onits non-Australian dollar denominated trading securities. These Funds agree to receive or deliver a fixed quantity of foreigncurrency for an agreed upon price on an agreed future date. Forward currency contracts are valued at the prevailing bidprice at the reporting date. The Funds recognise a gain or loss equal to the change in fair value at the reporting date.(c)Interest rate swapsInterest rate swap contracts are agreements under which the parties exchange one stream of interest for another. Theyare used to hedge cashflows against unfavourable movements in interest rates. The contracts are for interest rates onnotional principal amounts and can cover, for example, fixed interest rate to floating rate or fixed rate and floating rate tofixed rate. The party with the higher interest obligation pays the net amount to the other party. The amount received isconsidered an offset to the interest on investment or debt hedged. At reporting dates, the differences expected to be paidor received on the maturity of the contracts are marked-to-market with the unrealised gains and losses being recognisedin investment revenue.Page 143
COLONIAL FIRST STATE - FIRSTCHOICE WHOLESALE INVESTMENT FUNDS11. DERIVATIVE FINANCIAL INSTRUMENTS (continued)NOTES TO THE FINANCIAL STATEMENTSFOR THE PERIOD ENDED 30 JUNE 2011The Funds' derivative financial instruments at reporting period end are detailed below:FirstChoice Wholesale Global Share - HedgedContract/ Fair Values Contract/ Fair ValuesNotional Assets Liabilities Notional Assets Liabilities30/06/2011 30/06/2010$'000 $'000 $'000 $'000 $'000 $'000- Foreign currency forward contracts 2,128,520 17,472 (11,314) 3,119,881 61,098 (66,155)2,128,520 17,472 (11,314) 3,119,881 61,098 (66,155)- - - -Perpetual Wholesale Diversified GrowthContract/ Fair Values Contract/ Fair ValuesNotional Assets Liabilities Notional Assets Liabilities30/06/2011 30/06/2010$'000 $'000 $'000 $'000 $'000 $'000- Australian share price index futures (3,681) - (36) 2,024 - (117)- Australian interest rate futures (1,801) 2 - 1,139 33 -- Interest rate swaps 11,596 - (274) - - -6,114 2 (310) 3,163 33 (117)- - - -Perpetual Wholesale Conservative GrowthContract/ Fair Values Contract/ Fair ValuesNotional Assets Liabilities Notional Assets Liabilities30/06/2011 30/06/2010$'000 $'000 $'000 $'000 $'000 $'000- Australian share price index futures (7,592) - (72) (746) 21 -- Australian interest rate futures (9,194) 11 - 2,372 70 -- Foreign currency forward contracts 1,772 34 (11) - - -- Interest rate swaps 15,022 - (299) - - -12. CONTINGENT LIABILITIES AND COMMITMENTS8 45 (382) 1,626 91 -- - - -As at 30 June 2011 the Funds have no contingent liabilities and commitments (2010 - none).Page 144
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Dear InvestorYour Annual Financial
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FirstChoice Wholesale Investments - Colonial First State

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