267694 EdinburghIT AR 2024 WEB - Flipbook - Page 73
THE EDINBURGH INVESTMENT TRUST PLC / FINANCIAL REVIEW / 71
16. RISK MANAGEMENT, FINANCIAL ASSETS AND LIABILITIES
Financial instruments comprise the Company’s investment portfolio, derivative instruments (if any) as well as cash, and any
borrowings, debtors and creditors. This note sets out the Company’s financial instruments and the risks related to them.
Financial instruments
The Company’s financial instruments mainly comprise its investment portfolio (as shown on page 17), Unsecured Senior
Loan Notes, a bank facility as well as its cash, debtors and creditors that arise directly from its operations such as sales and
purchases awaiting settlement and accrued income. For the purpose of this note ‘cash’ should be taken to comprise cash and
cash equivalents as defined in note 1D. The accounting policies in note 1C include criteria for the recognition and the basis
of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from
financial assets and liabilities are recognised and measured.
The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk.
These are set out below:
Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in
market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:
–
Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes
in foreign exchange rates;
–
Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of
changes in market interest rates; and
–
Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other
than changes in foreign exchange rates or market interest rates.
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an
obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of
gearing of the Company as more fully described in the Directors’ Report.
The Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the
Company’s investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could
result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The associated
risk management policies are summarised below and have remained substantially unchanged for the two years under review
16.1 Market Risk
The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall
level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar
quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities on page 38. Any borrowing
to gear the investment portfolio is used to enhance returns but also increases the Company’s exposure to market risk and
volatility. The Company has the ability to gear using its £120 million Unsecured Senior Loan Notes.
16.1.1 Currency risk
The majority of the Company’s assets and liabilities are denominated in sterling. There is some exposure to US dollar, Swiss
franc and the Euro.
16.1.2 Inflation risk
The Company has no assets or liabilities that have direct inflation link properties.
Management of the currency risk
The Manager monitors the Company’s direct exposure to foreign currencies on a daily basis and reports to the board on
a regular basis. Forward currency contracts can be used to reduce the Company’s exposure to foreign currencies arising
naturally from the Manager’s choice of securities. All contracts are limited to currencies and amounts commensurate with the
assets denominated in currencies. No Forward currency contracts were used during the year (2023: none).
