Replacement Annual Financial Report -25-
April 30 2010 - 11:47AM
UK Regulatory
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| Derivative | 399,699 | 399,699 | 680,057 | 680,057 |
| financial | | | | |
| instruments | | | | |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| Financial | | (268,933,084) | | (190,107,679) |
| liabilities | - | | - | |
| at fair | | | | |
| value | | | | |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| Derivative | (408,560) | (408,560) | (892,415) | (892,415) |
| financial | | | | |
| instruments | | | | |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
Interest rate risk
The majority of the Company's financial assets are equity and mezzanine tranches
of cash flow CDOs. The Company's investments have some exposure to interest
rate risk but this is limited to floating Libor-based exposure for both the
CDO's assets and its liabilities.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2009
14. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
14.1. Market risk (continued)
The following table shows the Director's best estimate of the sensitivity of the
portfolio to stressed changes in interest rates, with all other variables held
constant. The table assumes parallel shifts in the respective forward yield
curves. The table also assumes 3 month US$ Libor ("$3m Libor") and 6 month EURO
Libor ("EUR6m Libor"), which are the standard indices for each type of CDO
transaction.
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| Company | Possible | Effect | Effect | Effect | Effect |
| | reasonable | on | on net | on | on net |
| | change in | profit | assets | profit | assets |
| | rate | 31 | 31 | 31 | 31 |
| | | December | December | December | December |
| | | 2009 | 2009 | 2008 | 2008 |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| $ 3m | -1% | (489,505) | (489,505) | 70,767 | 70,767 |
| Libor | | | | | |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| | 1% | 661,323 | 661,323 | (42,022) | (42,022) |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| EUR 6m | -1% | (691,242) | (691,242) | 526,034 | 526,034 |
| Libor | | | | | |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| | 1% | 720,659 | 720,659 | (529,130) | (529,130) |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| | | | | | |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| Consolidated | Possible | Effect | Effect | Effect | Effect |
| | reasonable | on | on net | on | on net |
| | change in | profit | assets | profit | assets |
| | rate | 31 | 31 | 31 | 31 |
| | | December | December | December | December |
| | | 2009 | 2009 | 2008 | 2008 |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| $ 3m | -1% | (384,093) | (384,093) | 96,291 | 96,291 |
| Libor | | | | | |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| | 1% | 590,306 | 590,306 | (57,179) | (57,179) |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| EUR 6m | -1% | (691,242) | (691,242) | 478,129 | 478,129 |
| Libor | | | | | |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
| | 1% | 720,659 | 720,659 | (480,943) | (480,943) |
+--------------+------------+---------------------+----------------------+----------------------+-------------------------+
Concentration of interest rate risk
+--------------+-----------+--------------+-----------+--------------+
| | Company | Consolidated | Company | Consolidated |
| | | | | |
+--------------+-----------+--------------+-----------+--------------+
| | 31 | 31 | 31 | 31 |
| | December | December | December | December |
| | 2009 | 2009 | 2008 | 2008 |
+--------------+-----------+--------------+-----------+--------------+
| | % | % | % | % |
+--------------+-----------+--------------+-----------+--------------+
| Investments | 100 | 100 | 100 | 100 |
| related to | | | | |
| floating | | | | |
| rate notes | | | | |
+--------------+-----------+--------------+-----------+--------------+
| | | | | |
+--------------+-----------+--------------+-----------+--------------+
| Investments | | | | |
| related to | - | - | - | - |
| fixed rate | | | | |
| notes | | | | |
+--------------+-----------+--------------+-----------+--------------+
| | | | | |
+--------------+-----------+--------------+-----------+--------------+
| Financial | 100 | 100 | 100 | 100 |
| liabilities | | | | |
+--------------+-----------+--------------+-----------+--------------+
Currency risk
The Company's investments are denominated in dollar and euro (the functional
currency of the Company). It is therefore exposed to currency risk, as the value
of the securities denominated in other currencies than the euro will fluctuate
due to changes in exchange rates. This exposure is mitigated by the use of
monthly rolling forward currency contracts as hedges.
The tables below indicate the currencies to which the Company had significant
exposure at 31 December 2009 on its trading monetary assets and liabilities. The
analysis discloses the Directors' best estimates of the effect of a reasonably
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