The Edinburgh Investment Trust Plc Annual Financial Report 2022 - Flipbook - Page 72
70 / FINANCIAL REVIEW / THE EDINBURGH INVESTMENT TRUST PLC
Notes to the Financial Statements / continued
16.1.1 Currency risk
The majority of the Company’s assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc
and the Euro.
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 (2021: none).
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to
mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.
The Company may invest up to 20% of the portfolio in securities listed on non-UK stock exchanges. At the year end holdings of
non‑UK securities total £144.3 million (2021: £98.8 million) representing 12.0% (2021: 8.6%) of the portfolio.
Currency exposure
The fair values of the Company’s monetary items that had a material currency exposure at 31 March are shown below. Where the
Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the
analysis so as to show the overall level of exposure.
2022
Foreign currency exposure on net monetary items
2021
USD
£’000
CHF
£’000
EUR
£’000
USD
£’000
CHF
£’000
EUR
£’000
3,793
1,106
2,389
1,915
859
979
Investments at fair value through profit or loss that are
equities
46,641
27,635
70,032
39,881
12,393
39,593
Total net foreign currency exposure
50,434
28,741
72,421
41,796
13,252
40,572
The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change
significantly throughout the year.
Currency sensitivity
In respect of the Company’s material direct foreign currency exposure to investments denominated in currencies, if sterling had
weakened by 2.0% (2021: 4.1%) for the US dollar, 1.5% (2021: 2.6%) for the Swiss franc and 1.2% (2021: 1.9%) for the Euro during
the year, the capital return and net assets of the Company would have increased for all currency exposures by £2.3 million (2021:
£3.0 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net
assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market
volatility in the year, using the standard deviation of sterling’s fluctuation to the applicable currency. This sensitivity takes no account
of any impact on the market values of the Company’s investments arising from the foreign currency mix of their respective revenues,
expenses, assets and liabilities.
16.1.2 Interest rate risk
Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on
variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest
dependent on the base rate determined by the custodian, The Bank of New York Mellon.
The Company has in place a revolving credit facility (the 'bank facility'), details of which are shown in note 11. The Company uses the bank
facility when required at levels monitored by the Board. At the maximum possible bank facility gearing of £25 million (2021: £50 million),
the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s income of £250,000
(2021: £500,000) per annum.