Financial risk management objectives and policies The Group’s major financial instruments include available-for-sale investments, investment in convertible bonds, notes receivable, amounts due from associates, trade debtors, financial assets carried at FVTPL, bank balances and cash, trade creditors, derivative financial instruments and borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
Interest rate risk Interest rate risk management The Group’s fair value interest rate risk relates to fixed-rate short term bank deposits, unsecured bonds and medium term notes for the first six months to twelve months starting from the issue date included in notes receivable, straight debt receivable in investment in convertible bonds and fixed rate bank and other borrowings. The Group’s exposure to cash flow interest rate risk is resulted from fluctuations in interest rates on medium term notes included in notes receivable and variable rate borrowings. The Group will continue to maintain a reasonable mix of floating-rate and fixed-rate borrowings and take actions such as using interest rate swap to hedge against any foreseeable interest rate exposure, if necessary.
The Group’s cash flow interest rate risk is mainly concentrated on the fluctuation of Hong Kong Interbank Offered Rate (“HIBOR”) and London Interbank Offered Rate (“LIBOR”) arising from the medium term notes included in notes receivable and variable rate borrowings.
The interest rate and terms of straight debt receivable in investment in convertible bonds, notes receivable, bank balances and borrowings for the Group are set out in notes 21, 22, 24 and 30, respectively.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for variable rate borrowings at the end of the reporting period. The effect on notes receivable is not included in the sensitivity analysis as the impact is insignificant. The analysis is prepared assuming the amounts of liabilities outstanding at the end of the reporting period were outstanding for the whole year. A 50 basis points (2009: 50 basis points) increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.
If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s profit before tax for the year ended 31 December 2010 would decrease/increase by HK$14,926,000 (2009: HK$19,848,000).
Annual Report 2010