Cornell University 2011-2012 Annual Report - DFA Home - Cornell ...

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands)C. Separately Invested Portfolio, Pooled Life Income Funds, and Dormitory Authority of the State of New York (DASNY) HoldingsThe University maintains a category of assets referred to as the separately invested portfolio. This category consists of assetsthat, for legal or other reasons, or by request of the donor, could not participate in any of the investment pools.Life income fund pools consist of donated funds, the income from which is payable to one or more beneficiaries duringtheir lifetimes. On the termination of life interests, the principal is available for University purposes, which may or maynot be restricted by the donors.University funds on deposit at DASNY consist of reserves for retirement of debt and bond proceeds not yet expended. Thetotal funds on deposit are $1,965 and $227,609 as of June 30, 2012 and 2011, respectively. The amount of bond proceeds notyet expended included in the total reserves at DASNY are $1,965 and $213,336 as of June 30, 2012 and 2011, respectively.D. Derivative HoldingsThe use of certain financial derivative instruments is governed by either the University’s written investment policy, specificmanager guidelines, or partnership/fund agreement documents. Specifically, financial derivative instruments may be usedto manage foreign currency exposure, to obtain commodity exposure, to create synthetic exposure, or to obtain protectionagainst increases in interest rates. These derivatives, based on definitions in GAAP, are not designated as hedging instruments.The University allocates a percentage of its assets to investment managers specializing in securities whose prices aredenominated in foreign currencies as part of its overall diversification strategy. The investment guidelines provide discretionto these managers to adjust the foreign currency exposure of their investment portfolio by using derivative instruments.The derivatives are used for buying or selling foreign currency under a short-term contract to lock in the dollar cost of aspecific pending purchase or sale of a foreign security, and selling foreign currency under a longer-term contract to hedgeagainst a general decline in the dollar value of foreign security holdings.As part of its overall investment strategy, the University’s investment managers manage a diversified portfolio of commodityfutures under strict investment guidelines. These commodity futures are fully collateralized and are denominatedin U.S. dollars.Some investment managers have discretion, limited by overall investment guidelines, to use derivative instruments to createinvestment exposures that could not be created as efficiently with other types of investments. These synthetic exposures inthe University’s portfolio as of June 30, 2012 are of four types: 1) forward contracts used to increase exposure to a foreigncurrency beyond the level of underlying security investments in that currency; 2) futures contracts used to create exposuresto assets where the futures market provides a more efficient investment than the underlying securities; 3) swap contracts,also used to provide a more efficient means to gain exposure than the underlying securities; and 4) option contracts usedto adjust the exposure of the fixed-income portfolio to interest rate volatility.The University entered into option contracts on interest rates swaps as a way to mitigate the impact of a significant rise ininterest rates in the future.The following table provides detailed information on the derivatives included in the investment portfolio as of June 30.All the derivatives have been deemed Level 2 in the fair-value hierarchy.FAIR VALUE OF DERIVATIVE HOLDINGS IN STATEMENT OF FINANCIAL POSITION2012 2011LocationInvestmentsDerivative typeNotionalamount# ofContractsLevel 2fair valueNotionalamount# ofContractsLevel 2fair valueForeign currency $ -67 $ 1,385 $ -51 $ (1,126)Commodity 314,893 53 3,563 257,239 50 (7,015)Synthetic (23,198) 41 153 68,043 46 115Interest rate 444,703 4 (8,156) 2,067,903 5 10,746Total fair value $ 736,398165 $ (3,055) $ 2,393,185152 $ 2,72022