Page 17 - TreasuryChinaTrust

Treasury China Trust Annual Report 2010 80

NOTES TO THE FINANCIAL STATEMENTS

Period from 19 May 2010 (date of constitution) to 31 December 2010

26 Financial risk management (Continued)

(c) Market risk (Continued)

Foreign currency risk

The Group incurs foreign currency risks as a result of its operations in the PRC and interest-bearing liabilities. The currency giving rise to this risk at the balance sheet date is the US Dollar.

Exposures to significant foreign currencies risk are as follows:

US Dollar Group $’000

As at 31 December 2010

Derivative financial assets 55 Cash and cash equivalents 41,334 Interest-bearing borrowings (576,867) Trade and other payables (484)

(535,962)

Sensitivity analysis

The following table indicates the approximate change in the Group’s income statement in response to a 10% increase in the foreign exchange rates to which the Group has significant exposure at the balance sheet date.

Income statement Group $’000

As at 31 December 2010

US Dollar 53,596

A weakening of the foreign exchange rates at 31 December 2010 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

(d) Interest rate risk

The Group’s exposure to changes in interest rates relates primarily to interest-bearing borrowings. Interest rate risk is managed by the Group on an on-going basis with the primary objective of limiting the extent to which net interest expense could be affected by an adverse movement in interest rates. In order to minimise exposure to changes to interest rates, the Group has purchased certain hedging instruments the purpose of which is to fix the interest rates payable on its loan facilities.

The Group finances its operations through a mixture of retained earnings, interest-bearing loans and borrowings and stated capital. The Group borrows in the desired currencies at floating rates and uses interest rate swap contracts to generate the desired interest rate profile and to manage the Group’s exposure to interest rate fluctuations.

The Group completed a series of refinancing in December 2010 and unwound the interest rate swaps linked to the replaced loans. Hence, 100% of the Group’s interest-bearing liabilities were at floating rates of interest at the end of the reporting period. The Group is considering new interest rate swap contacts for the new bank loans.

An interest rate cap, denominated in US Dollars, has also been entered into to limit the Group’s exposure to changes in the interest rate on a US Dollar bank loan which bears interest at LIBOR plus margin. The notional contract amount is US$37.8 million (equivalent to approximately $48.6 million) whereby the Group will receive payments when the interest rate exceeds the agreed strike price of 2.825% between 10 December 2011 and 9 December 2012, exclusive of loan margin of 3.5%. The fair value of the interest rate cap as at 31 December 2010 was an asset of $55,000.