The Edinburgh Investment Trust Plc Annual Financial Report 2022 - Flipbook - Page 71
THE EDINBURGH INVESTMENT TRUST PLC / FINANCIAL REVIEW / 69
16. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
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 pages 16 and 17), a debenture, 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.
As an investment trust 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 pages 35 and 36. 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 £100 million debenture 2022 together with the newly issued £20m Unsecured Senior Loan Notes. In addition there is a
bank facility of £25 million (2021: £50 million).