1. Market
Risk
the most important tool to reduce market risks is the benchmark defined as the
asset allocation for both bonds and currencies. This benchmark is obtained via
maximization process under some given assumptions. Optimization results depend
on the investment horizon with Value-at risk which is considered low compared
with other long-term investments such as pension funds.
In
practice, investment managers will allocate assets differently from the
benchmark. Actual returns and benchmark returns will not differ too much as the
bank of Thailand limits deviations from benchmark in terms of Tracking error
limits. (TE limits are the expected returns from deviating from
benchmarks). Levels of TE limits depend on past investment records
and volatility of returns. Both benchmark and TE have to be approved by the
executive committee and reviewed annually.
2. Credit Risk
All assets are subject to credit risk exposure and the bank of Thailand has a
guideline for minimum acceptable credit rating to be investment grade and limit
the maximum amount for each credit risk levels. The higher the credit risks, the
lower the amount allowed for investment. In addition, there is also a guideline
for concentration risks to avoid having too much credit risk exposure in any one
country.
The Bank of
Thailand has a strict guideline for credit risk exposures with commercial banks
such as high minimum credit rating for safety and limits the amount of
transactions the Bank of Thailand has with each counterparty. Similar to
government bonds the Bank of Thailand diversifies across various counterparties
to reduce the concentration of credit risks.
Each credit risk limit must be reviewed and approved by the executive
committee and updated periodically depending on the changing financial
environments.
3.
Liquidity Risk
The Bank of
Thailand deals with liquidity risks by allocating a separate fund for the
Liquidity Portfolio and has limited the holdings of illiquid assets such as bank
deposits to a level such that it will not incur large losses when wanting to
liquidate those assets. As of now, Repurchase Agreements and Interest rate
futures are included in the asset universe.
4. Performance and
Risk Measurement
The bank of Thailand values the official reserves daily using the marked-to
market method. The department responsible for evaluating,
marking-to-market daily portfolio values and risk management is completely
independent from the office of reserves management. Furthermore the bank of
Thailand issues a monthly return and risk attribution report for use in risk
budgeting analysis. This report will be presented to the investment committee,
executive committee and other highly qualified outsiders such as examination