Exchange rates are the most important risk factor for the currency reserves. Even minor changes in the Swiss franc exchange rates lead to substantial fluctuations in investment income, and thus in the SNB’s equity. In addition to currency risk, fluctuations in the gold price and stock prices as well as interest rate risk are relevant as well. Currency risk, share price risk and interest rate risk are limited through the specification of benchmarks and management guidelines. Various means, including the use of derivative financial instruments such as interest rate swaps, stock index futures and interest rate futures, are used to control these risks. Foreign exchange derivatives can be used to manage the currency mix.

The SNB does not hedge currency risk against the Swiss franc, as hedging would have an undesirable impact on monetary policy. Hedging operations, for example selling foreign exchange forwards against Swiss francs, would create additional demand and increase upward pressure on the Swiss franc. Therefore, hedging would de facto have the same effect as a foreign exchange market intervention to strengthen the Swiss franc. For these reasons, currency risk must be accepted as an inherent component of currency reserves.

Credit risk stems from the possibility that counterparties or issuers of securities do not meet their obligations. Such risks are inherent in bonds issued by all borrower categories. The SNB holds bonds issued by public and supranational borrowers, covered bonds and similar instruments, as well as corporate bonds, as part of its currency reserves. For bonds, the SNB requires a minimum rating of ‘investment grade’. Exposure to individual issuers is limited by means of concentration limits. Credit risk arising from non-tradable instruments with respect to banks is very low. Replacement values of derivatives are netted in accordance with the ISDA agreements with counterparties and are collateralised on the basis of Credit Support Annexes (CSA). Since May 2014, the SNB has been settling most of its interest rate swaps via a central counterparty. This facilitates netting of offsetting positions. Additionally, efficiency gains are made in the daily management of collateral.

Most of the bonds held are government bonds. The bulk of these are highly liquid bonds issued by core European countries and the US.

The SNB’s liquidity risk arises from the possibility that, should investments in foreign currencies need to be sold, such sales could be effected only partially or after considerable price concessions, or may not be possible at all. The SNB ensures a high level of liquidity in its foreign currency reserves by holding a large number of the most liquid government bonds in the major currencies, namely euros and US dollars.  Liquidity risk is reassessed periodically.

Country risk arises from the possibility that a country may hinder payments by borrowers domiciled in its sovereign territory or block the right to dispose of assets held there. In order to avoid entering into any unbalanced country risk, the SNB endeavours to distribute assets among a number of different depositories and countries. Gold holdings are stored according to this principle as well. In choosing a location, attention is paid to both appropriate regional diversification and easy market access. Of the 1,040 tonnes of gold, approximately 70% is still held in Switzerland, some 20% at the Bank of England, and roughly 10% at the Bank of Canada. Decentralised storage of gold holdings in Switzerland and abroad ensures that the SNB has access to its gold reserves even in the event of a crisis.