NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2025 41 FINANCIAL INSTRUMENTS (CONT’D) (iii) Market risk Market risk is the risk that changes in market prices such as interest rates, foreign exchange rates and equity prices, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return. Interest rate risk The Group’s exposure to interest rate risk relates primarily to its interest-bearing financial assets and debt obligations. The Group adopts a policy of managing its interest rate exposure by maintaining a debt portfolio with both fixed and floating interest rates. Derivative financial instruments are used to manage interest rate risk, to the extent that the perceived cost of variable rate borrowings is considered to outweigh the benefits of their flexibility, and the Group actively monitors the need and timing for such derivatives. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional or par amounts. The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method. Derivatives The Group holds interest rate swaps and cross currency swaps for risk management purposes. The interest rate swaps have floating legs that are indexed to SORA, SONIA, TONA, TIBOR and EURIBOR. The Group’s derivative instrument are governed by contracts based on the International Swaps and Derivatives Association (ISDA)’s master agreements. Cash flow sensitivity analysis for variable rate instruments An increase of 100 basis points (bp) in interest rates on the variable rate instruments held by the Group and the Company at the reporting date would have decreased profit or loss (before any tax effect) by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant and does not take into account the effect of qualifying borrowing costs allowed for capitalisation. Group Company 31 December 2025 31 December 2024 31 December 2025 31 December 2024 $’000 $’000 $’000 $’000 100 bp increase Reduction in profit before tax (71,679) (70,936) (57) (13,708) A 100 bp decrease in interest rates at the reporting date would have had an equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant. 204 | CITY DEVELOPMENTS LIMITED
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