FirstChoice Wholesale Investments - Colonial First State

COLONIAL FIRST STATE - FIRSTCHOICE WHOLESALE INVESTMENT FUNDS14. HEDGE ACCOUNTINGNOTES TO THE FINANCIAL STATEMENTSFOR THE PERIOD ENDED 30 JUNE 2011(a)Financial Risk ManagementFirstChoice Wholesale Global Share - Hedged is referred to as the Fund in this note. Its investments, being the units heldin other global direct holding share funds, indirectly expose it to a variety of financial risks: market risk (including foreignexchange risk, interest rate risk and price risk), credit risk and liquidity risk. The Fund's overall risk management programfocuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financialperformance of the Fund. The Fund uses derivative financial instruments such as Forward Currency Contracts to hedgeforeign exchange risk exposures. The Fund may construct a basket of the most liquid currencies available within theportfolio to act as a proxy for the less liquid currency exposures. These contracts are exclusively used for hedgingpurposes, for example, not as speculative instruments.Risk management is carried out by the Compliance and Risk Management Department of the Responsible Entity underpolicies approved by the board of directors. The Compliance and Risk Management Department identifies, evaluates andhedges indirect foreign exchange risks in close co-operation with the Investment manager. The board provideswritten principles for overall risk management, as well as policies covering specific areas, such as foreign exchange riskand use of derivative financial instruments.Market Risk - Foreign Exchange RiskThe Fund indirectly holds both monetary and non-monetary assets denominated in currencies other than the Australiandollar. The foreign exchange risk relating to non-monetary assets and liabilities is a component of price risk. Foreignexchange risk arises as the value of monetary securities denominated in other currencies will fluctuate due tochanges in exchange rates. The risk is measured using sensitivity analysis, see Note 10.The Compliance and Risk Management Department of the Responsible Entity has set up an investment policy requiringthe Fund to manage its foreign exchange risk against its functional currency. The fund is required to hedge its indirectforeign exchange risk exposure arising from recognised investments using hedging instruments such as ForwardCurrency Contracts. The Fund's investment risk management policy is to hedge between 99 and 101 per cent of theforeign exchange exposures.(b)Derivative Financial InstrumentsInstruments used by the FundThe Fund is party to derivative financial instruments in the normal course of business in order to hedge exposure tofluctuations in foreign exchange rates in accordance with the Fund's investment risk management policy stated above.i) Derivatives Held for Fair Value HedgeForward Currency ContractsIn order to protect against exchange rate movements, the Fund has entered into Forward Currency Contracts, the termsand conditions of these contracts are usually short term three months and are contracted in accordance with theinvestment guidelines. These contracts are a hedging instrument held by the Fund and are classified as FinancialAssets or Liabilities Held for Trading.Page 146