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24 Financial instrument risk
The Law Commission’s activities expose it to a variety of financial instrument
risks, including market risk, credit risk and liquidity risk. The Law Commission
has a series of policies to manage the risks associated with financial instruments
and seeks to minimise exposure from financial instruments. These policies do
not allow any transactions that are speculative in nature to be entered into.
Market risk
The interest rates on the Law Commission’s investments are disclosed in
note 16.
Fair value interest rate risk
Fair value interest rate risk is the risk that the value of a financial instrument
will fluctuate due to changes in market interest rates. The Law Commission’s
exposure to fair value interest rate risk is limited to its bank deposits which are
held at fixed rates of interest.
Credit risk
Credit risk is the risk that a third party will default on its obligations to the
Law Commission, causing the Law Commission to incur a loss.
Due to the timing of its cash inflows and outflows, the Law Commission invests
surplus cash with registered banks.
The Law Commission’s maximum credit exposure for each class of financial
instrument is represented by the total carrying amount of cash and cash
equivalents (note 7), net debtors (note 8) and term deposits. There is no
collateral held as security against these financial instruments.
The Law Commission has no significant concentrations of credit risk, as it has
a small number of credit customers and only invests funds with registered
banks with specified credit rating.
Liquidity risk
Liquidity risk is the risk that the Law Commission will encounter difficulty
raising liquid funds to meet commitments as they fall due.
In meeting its liquidity requirements, the Law Commission maintains a target
level of investments that must mature within specified timeframe
All creditors and other payables are due for settlement within