Annual Report 2012 - Development Securities PLC

Financial Statements continued
Notes to the Consolidated Financial Statements continued
For the 14-month period ended 29th February 2012
18 Financial assets and financial liabilities continued
c) Financial risk management continued
Foreign currency risk
The Group does not undertake significant trade overseas, but does hold certain assets, amounting to £89,000 (31st December 2010: £642,000)
denominated in foreign currencies. The currency exposure arising from these investments is not considered to materially affect the Group’s operations and
is not subject to hedging arrangements.
The Group is exposed to foreign currency risk from €47,000,000 (31st December 2010: €47,000,000) loan notes issued during 2007 that are denominated
in Euros.
The Group has entered into a currency and interest rate swap with a banking institution to minimise these potential risks. The swap is cash collateralised and
qualifies to be accounted for as a cash flow hedge as detailed below. The fair value of this instrument at 29th February 2012 was a liability of £1,925,000
(31st December 2010: £3,302,000 asset).
The Group maintains a security deposit of £4,000,000 (31st December 2010: £4,000,000) throughout the loan note term. The security deposit is required
to cash collateralise the risk for the swap counterparty. The Group is further required to increase this security if the Group's potential liability under the
instrument increases to within £250,000 of the security deposit.
During the 14-month period to 29th February 2012, the movement of Sterling against the Euro was approximately 8.0 per cent. Management has therefore
measured sensitivity on this basis.
The following table demonstrates the possible effect of changes in Sterling and Euro exchange rates with all other variables held constant:
96 Development Securities PLC / Annual Report 2012
Increase/
decrease in
Euro rate
Effect
on cash
collateral
£’000
29th February 2012
Euro +8% (430)
–8% 505
31st December 2010
Euro +8% (442)
–8% 522
The Group does not undertake significant foreign exchange trading activity; consequently, a detailed foreign exchange sensitivity analysis is not presented.
Interest rate sensitivity
The following table demonstrates the sensitivity in respect of variable rate debt obligations to a change in interest rates, with other variables held constant,
of the Group’s (loss)/profit before income tax.
The sensitivity analysis excludes all non-derivative fixed-rate financial instruments carried at amortised cost as well as variable rate financial instruments
with associated effective fixed-rate hedging instruments or currency hedging instruments.
Fair value interest rate hedging instruments that are part of a hedging relationship have been excluded. Variable rate non-derivative financial instruments
where the associated interest has been capitalised have also been excluded.
As at 29th February 2012, a movement of 50 basis points higher or lower, with all other variables held constant would have the following effect on (loss)/
profit before tax. Management consider a movement of 50 basis points to be a reasonable guide to sensitivity in the current interest rate environment.
Increase/
decrease in
basis points
Effect
on profit
before tax
£’000
29th February 2012
Sterling borrowings +50 (129)
–50 129
31st December 2010
Sterling borrowings +50 (221)
–50 221
Price risk
The Group is not exposed to commodity or security price risk.