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86

27 FINANCIAL INSTRUMENTS (CONTINUED)

(b) Market risk (continued)

(iii) Interest rate risk

The Trust’s interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Trust to cash flow

interest rate risk. Borrowings issued at fixed rate expose the Trust to fair value interest rate risk.

The Trust adopts a policy of ensuring that between 25 and 90 percent of its exposure to changes in interest rates on borrowings

is on a fixed rate basis.

The Trust manages its cash flow interest rate risk by using floating to fixed interest rate swaps. Such interest rate swaps have the

economic effect of converting borrowings from floating rates to fixed rates.

Under interest rate swap contracts, the Trust agrees to exchange the difference between fixed contract and floating rate interest

amounts calculated by reference to the agreed notional principal amounts. Such contracts enable the Trust to mitigate the risk

of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued variable

rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows at

reporting date and the credit risk inherent in the contract, and are disclosed below. The average interest rate is based on the

outstanding balances at the start of the financial year.

Sensitivity analysis

As at 31 March 2016, if the 90-day bank bill rate had been 50 basis points higher or lower, with all other variables held constant,

the Trust’s surplus/(deficit) for the year and the equity would have been $463,193 (2015: $481,640) higher or lower. This

movement is attributable to an increase or decrease in the interest expense on floating rate loans and in the interest income

from deposits. The sensitivity is slightly lower in 2015 due to a higher level of debt fixed with swap instruments proportional to

total bank debt.

(c) Liquidity risk

Liquidity risk is the risk that the Trust will encounter difficulty raising liquid funds to meet commitments as they fall due. The

Trust manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously

monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

The table below analyses the Trust’s financial liabilities that will be settled based on the remaining period at balance date to the

contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.

Maturities of financial liabilities

The tables below analyse the Trust’s financial liabilities and net settled derivative financial instruments into relevant maturity

groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the

table are the contractual undiscounted cash flows.

WAIKATO RAUPATU LANDS TRUST

Notes to the financial statements

FOR THE YEAR ENDED 31 MARCH 2016