PSH-Annual-Report

Annual Report December 31, 2014Notes to Financial Statements (continued)13. FINANCIAL RISK AND MANAGEMENTOBJECTIVES AND POLICIES (continued)Interest Rate RiskInterest rate risk arises from the possibility thatchanges in interest rates will affect future cashflows or the fair values of financial instruments.Generally, most financial assets decline in valuewhen interest rates rise, and increase in valuewhen interest rates decline. The Company doesnot generally hedge its interest rate exposure asthe Investment Manager does not, generally,believe that hedging interest rate risk is a prudentuse of capital.The Company’s investment in cash and cashequivalents has limited exposure to interest raterisk because the duration of these investments isless than 90 days. As of December 31, 2014 andDecember 31, 2013 cash and cash equivalentsequaled $565,809,913 and $389,656,631,respectively.Currency RiskThe Company invests in financial instruments andenters into transactions that are denominated incurrencies other than USD. Consequently, theCompany is exposed to risks that the exchangerate of the USD relative to other foreign currenciesmay change in a manner that has an adverseeffect on the fair value of future cash flows of thatportion of the Company’s financial assets orliabilities denominated in currencies other thanUSD.The primary purpose of the Company’s foreigncurrency economic hedging activities is to protectagainst the foreign currency exposure associatedwith investments denominated in foreigncurrencies. The Company primarily utilizes forwardexchange contracts and currency options to hedgeforeign currency denominated investments.Increases or decreases in the fair value of theCompany’s foreign currency denominatedinvestments are partially offset by gains and losseson the economic hedging instruments.The following tables show the currencies to whichthe Company had significant direct exposure atDecember 31, 2014 and December 31, 2013 on itsfinancial assets and liabilities. The analysiscalculates the effect of a reasonably possiblemovement of the currency rate against USD onequity and on profit or loss with all other variablesheld constant.Currency(2014)Net ForeignCurrencyExposureChange inCurrency RateEffect on Net AssetsAttributable toall Shareholdersand on Profit/(Loss)for the YearCAD $ 863,798,268 +9% $ 76,821,535Total $ 863,798,268 $ 76,821,535Currency(2013)Net ForeignCurrencyExposureChange inCurrency RateEffect on Net AssetsAttributableto all Shareholdersand on Profit/(Loss)for the YearCAD $ 222,889,898 +7% $ 15,602,293EUR 52,233,859 +7% 3,656,370GBP 1,589,482 +9% 143,053Total $ 276,713,239 $ 19,401,716An equivalent decrease in each of theaforementioned currencies against USD wouldhave resulted in an equivalent but opposite impact.Equity Price RiskAs explained in the Company’s Prospectus, theCompany may be highly concentrated, investing asignificant proportion of its capital in one or alimited set of investments. A substantial majority ofthe Company’s portfolio is typically allocated to 8 to12 core holdings usually comprised of highly liquid,listed mid-to-large cap North American companies.Because the portfolio is highly concentrated andprimarily invested in public equities (or derivativeinstruments referenced to public equities), asignificant risk to the portfolio is fluctuations inequity prices.The following tables indicates management’s bestestimate of the effect on the Company’s net assetsdue to a possible change in equity prices with allother variables held constant.% Change in Net AssetsAttributable toall ShareholdersChange in Equity Price 2014 2013+7% +6% +7%-7% -6% -6%62 PERSHING SQUARE HOLDINGS, LTD.