Page 91 - Annual Report 2010

89

Financial Statements

During 2010 the capital charge for the G&S portfolio increased significantly driven by the deterioration of some underlying assets.

internal ratings, information gathered through regular monitoring, and discounted cash flow analysis.

The value of guarantee transactions is not directly subject to fluctuations with interest rates during the life of the trans-actions. The interest rate risk impact on underlying port-folios is indirectly assessed during the quarterly review of the transaction’s performance. A change of a transac-tion rating usually implies a revision of the transaction’s expected loss, capital charge and transaction valuation.

3.5.3.1.C. Treasury

Approximately 76.7% of liquid assets held have an aver-age duration of up to 5 years, thereby safeguarding the Fund against the substantial fluctuations in its long-term revenues.

Moreover, speculative operations are not authorised. In-vestment decisions are based on the interest rates avail-able in the market at the time of investment.

The following table illustrates the Fund’s exposure to inter-est rate risk (figures are presented at fair value) at the time they reprice or mature:

EURm 31.12.2010 31.12.2009

Capital Charges 110.3 163.1 Guarantees Drawn 3 160.3 3 231.5 Guarantees Undrawn 48.6 55.6 Exposure at risk 2 580.2 2 893.0 Yearly guarantee calls 6.7 0.8

Liquidity risk: Portfolio guarantees & securitisation

3.5.3 Market risk

Market risk is the risk that the net present value of future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and security prices.

3.5.3.1. Market risk: interest rate risk

More than half of the Fund’s income and operating cash flows are unaffected by changes in market interest rates. The Fund’s interest rate risk arises mainly from cash and cash equivalent positions as well as investments in debt securities.

3.5.3.1.A. Private Equity

As PE fund investments are financed by equity and are not leveraged, direct sensitivity to interest rate is not a consideration.

3.5.3.1.B. Portfolio Guarantees & Securitisation

Transactions in which EIF acts as guarantor are typically in illiquid markets and representative market prices are not available. EIF has therefore developed a mark-to-model approach to value these transactions, using external and