Financial risk and management objectives and policies continued

Notes to the financial statements for the year ended 31 December 2015 44

12. Financial risk and management objectives and policies continued

a Market risk continued iii Currency risk continued Summarized sensitivity analysis The Petroleum Fund is primarily exposed to the Euro, Australian Dollars, Pound Sterling and Japanese Yen. The following table details the Petroleum Funds sensitivity to a 10 increase and decrease in the United States Dollar against the relevant foreign currencies. 10 is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10 change in foreign currency rates. The sensitivity analysis includes cash and cash equivalents, interest receivable and qualifying instruments. A negative number below indicates a decrease in profit where the United States Dollar strengthens 10 against the relevant currency. For a 10 weakening of the United States Dollar against the relevant currency, there would be a comparable impact on the profit, and the balances below would be a positive. The analysis presumes that all other variables, in particular interest rates, remain constant. As at 31122015 USD As at 31122014 USD EUR impact 123,217,492 120,073,182 AUD impact 32,586,762 34,033,587 GBP impact 63,325,383 73,227,654 JPY impact 74,465,343 69,219,924 Other currencies impact 133,419,819 137,395,483 Total currencies impact 427,014,799 433,949,830 This is mainly attributable to the exposure outstanding on all relevant foreign currencies relating to cash and cash equivalents, interest receivable and qualifying instruments in the Petroleum Fund at the end of the reporting period. b Credit risk Credit risk is the risk of loss that arises from a counterparty failing to meet their contractual commitments in full and on time, or from losses arising from the change in value of a traded financial instrument as a result of changes in the credit risk on that instrument. It arises principally from debt securities held, and also from derivative financial instruments, cash and cash equivalents, balances due from brokers and receivables from reverse repurchase agreements. For risk management reporting purposes the Fund considers and consolidate all elements of credit risk exposure, reflecting the fact that the main concentration t o which the Fund is exposed arises from the Fund’s investments in debt securities. i Credit risk management Article 15 of the Petroleum Fund Law provides broad constraints on the extent of credit risk that can be taken by the Petroleum Fund. To qualify as an eligible investment, debt must have a credit quality of at least equal to investment grade, while deposits are only held with financial institutions with a credit rating of at least investment grade. The investment grade rating reflects the credit ra ting agencies’ assessment of capacity by the issuer to pay. Higher ratings reflect lower credit risk associated with the bonds. Credit risk is also managed by limiting exposure to any one company or issuer except for a sovereign state to 3 of the total value of the Petroleum Fund. The limits are reflected in the underlying investment mandates with managers and are monitored by the BCTL. The Fund’s maximum exposure to credit risk at reporting date in relation to each class of financial asset is the carrying amount of those assets as indicated in the statement of financial position. The allocation of investments is 40 to listed equities and 60 to investment grade fixed interest securities, which was achieved in 2014 and has been maintained during the 2015 year. The IAB regularly monitors and reviews the strategic asset allocation between asset classes with consideration to the desired risk profile of the Fund. The current strategic asset allocation is continually monitored and discussed at the IAB meetings and the Board considers this to be an appropriate level given the current investment horizon of the Fund. The mandate in the Operational Management Agreement prescribes that the performance of the Petroleum Fund shall be measured against benchmark indexes for a series of mandates, restricts the permissible investment universe to highly rated financial instruments, and establishes tracking error limits restricting the permissible deviation of the portfolio investments from the benchmark for each mandate. The maximum loss that the Petroleum Fund would suffer from the default of a single issuer is the amount disclosed below with respect to investments in Treasury Notes issued by the United States Government and Equity Securities traded on developed market exchanges. Notes to the financial statements for the year ended 31 December 2015 45

12. Financial risk and management objectives and policies continued