Market price risk arises mainly from uncertainty about future
prices of financial instruments held. It represents the potential
loss the Company might suffer through holding market positions in
the face of price movements. The Investment Manager actively
monitors market prices and reports to the Board as to the
appropriateness of the prices used for valuation purposes. On a
periodic basis independent valuations of the Company's investments
are obtained from the Calculation Agent. A list of investments held
by the Company is shown in the Schedule of Investments as contained
within this report.
The Investment Manager also monitors on a monthly basis the
market price risk of each Cell's underlying financial assets and
liabilities using statistical measures, such as Delta. Delta is the
percentage change in price of a derivative in relation to a 1%
change in the price of the underlying security, index or rate. As
there is no secondary market for the Company's investments, the
Board cannot directly monitor nor control market price risk.
Price sensitivity
If market prices as at 31 October 2013 had been 10 per cent
higher/lower, and assuming these values were to remain unchanged
through to the end of the life of the cells, with all other
variables held constant, the increase/decrease in net assets
attributable to holders of Cell Shares on the Redemption Date would
have been as stated below, arising due to the increase/decrease in
the fair value of the financial assets at fair value through profit
or loss.
Increase in net assets Decrease in net assets
attributable to holders attributable to holders
of Preference Shares of Preference Shares
Year ended Year ended Year ended Year ended
31 October 31 October 31 October 31 October
2013 2012 2013 2012
Cell GBP GBP GBP GBP
US HI A Cell - 2,944,892 - (2,944,892)
US HI B Cell - 1,390,195 - (1,390,195)
Agrinvest
Cell - 5,823,850 - (5,823,850)
EPR Cell 2,387,949 2,216,176 (2,387,949) (2,216,176)
EBM3 Cell 4,925,140 4,996,199 (4,925,140) (4,996,199)
EI Cell - 1,853,444 - (1,853,444)
UK EI Cell 5,486,911 5,109,677 (5,486,911) (5,109,677)
COMAC Cell 3,178,574 2,951,840 (3,178,574) (2,951,840)
USEI A Cell 4,479,155 4,336,372 (4,479,155) (4,336,372)
USEI B Cell 3,864,177 3,671,220 (3,864,177) (3,671,220)
------------- ------------ ------------- -------------
24,321,906 35,293,865 (24,321,906) (35,293,865)
============= ============ ============= =============
(c) Credit Risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Company. At the date of this report the issuer was rated
A+ by Standard & Poor's for credit purposes.
Investors should be aware that repayment by the Company at the
relevant redemption date of the redemption proceeds due to
shareholders will only be performed if the Counterparty satisfies
its obligations under the relevant contract to repay to the Company
any amount due. Under the terms of the Credit Support Deeds between
the Company and the Counterparty, the Counterparty is required to
deliver varying amounts of collateral to an escrow account held in
favour of the Company.
Under the terms of Credit Support Deeds entered into between the
Counterparty and the Company acting for and on behalf of each cell,
the Counterparty is required to post collateral in the form of AAA
rated government bonds in favour of the Company acting for and on
behalf of each cell, such collateral being valued on a weekly basis
and, if the value of the collateral is less than the value
calculated as specified below (the "Credit Support Amount"), the
Counterparty will provide additional collateral to increase the
aggregate value to at least the Credit Support Amount. Where there
is an event of default in respect of the Counterparty under the
swap confirmation, the Company will be entitled to enforce against
the Counterparty its security over the collateral.
Due to the collateral being monitored on a weekly basis (as
detailed above), there is a risk due to timing that the amount
posted to collateral will be less than the Credit Support
Amount.
The Credit Support Amount is the lesser of (a) 100% of the net
asset value of the relevant cell and (b) the total of the
Applicable Percentage of such net asset value plus 10% of such net
asset value (where the "Applicable Percentage" is calculated so as
to reflect the percentage of shares in the relevant cell held at
the relevant time by shareholders other than BNP Paribas Arbitrage
SNC).
The most significant concentration of credit risk for the
Company is that the Counterparty will be unable to satisfy its
obligations under the relevant contract to repay to the Company any
amount due. The maximum credit risk exposure at the reporting date
is therefore considered to be the total valuation of the
investments at this date, being GBP243,219,046 (Oct 2012:
GBP352,938,637).
The Investment Manager and Administrator monitor collateral
posted on a weekly basis and report to the Board quarterly on the
Counterparty's compliance with the relevant Credit Support Deeds.
The Investment Manager and Administrator have also undertaken to
report to the Board immediately if there is a breach of compliance
with the terms of the relevant Credit Support Deeds.
The Board monitors, but cannot control, credit risk.
(d) Liquidity Risk
Liquidity risk is the risk that the Company will encounter
difficulty in realising assets or otherwise raising funds to meet
financial commitments and obligations to shareholders on redemption
of their shares of a cell. The only financial commitments of the
Company are to meet on-going expenses and these are met out of
monies provided to the Company's Administrator by BNP Paribas
SA.
There is a further liquidity risk in respect of the redemption
of shares, the dates of which are set out in note 6(g) (ii).
As the investments are not traded in an active market, the
Company may not be able to liquidate quickly its investments in
these instruments at an amount close to their fair value to meet
its liquidity requirements or to respond to specific events such as
deterioration in the credit worthiness of the Counterparty.
The table below details the residual contractual maturities of
the financial liabilities:
At 31 October 2013 1-3 months 3-12 months Over 1 year Total
GBP GBP GBP GBP
Net assets attributable
to holders of Management
Shares 263,128 - - 263,128
Net assets attributable
to holders of Preference
Shares - 73,130,881 170,088,165 243,219,046
----------- ------------- -------------- --------------
263,128 73,130,881 170,088,165 243,482,174
At 31 October 2012 1-3 months 3-12 months Over 1 year Total
GBP GBP GBP GBP
Net assets attributable
to holders of Management
Shares 334,320 - - 334,320
Net assets attributable
to holders of Preference
Shares 43,350,865 58,238,503 251,349,269 352,938,637
------------- ------------- -------------- --------------
43,685,185 58,238,503 251,349,269 353,272,957
The table below details the expected liquidity of assets
held:
At 31 October 2013 1-3 months 3-12 months Over 1 year Total
GBP GBP GBP GBP
Net assets 263,128 73,130,881 170,088,165 243,482,174
----------- ------------ ------------ ------------
At 31 October 2012 1-3 months 3-12 months Over 1 year Total
GBP GBP GBP GBP
Net assets 43,685,185 58,238,503 251,349,269 353,272,957
----------- ------------ ------------ ------------
The Board monitors, but cannot actively control liquidity
risk.
(e) Capital Risk Management
The Company has an unlimited life but the Protected Cell Shares
for each cell have a fixed redemption date.
The Company's objective when managing capital is to safeguard
the Company's ability to continue as a going concern in order to
provide returns for shareholders.
The Board of directors believe the current capital structure to
be sufficient in meeting the capital requirements of the
Company.
All expenses are borne by BNP Paribas SA and redemption proceeds
are limited to the amounts received, if any, on the maturity or
early termination of the relevant investment contract between the
Company and the Counterparty.
Potential losses to shareholders are mitigated by the returns
stipulated in the swap agreement with the Counterparty as described
in note 6(h) and the collateral arrangements which are set out in
note 6(i).
(f) Foreign Exchange Risk
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