Georgia Healthcare Group PLC Annual Report 2018 Financial Statements Notes to Consolidated Financial Statements continued (Thousands of Georgian Lari unless otherwise stated) 39. Risk management continued Market risk Market risk is the risk that the value of financial instruments will fluctuate due to changes in market variables such as interest rates and foreign exchange rates. The Group has exposure to market risks. The Group structures the levels of market risk it accepts through a Group market risk policy that determines what constitutes market risk for the Group. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair value of the financial instruments or the future cash flows on financial instruments. The Group has floating interest rate borrowings linked to LIBOR and NBG short-term loan refinancing rates and is therefore exposed to interest rate risk. 31 December 2018 31 December 2017 GEL US$ EUR GEL US$ EUR Amounts due from credit institutions 9.30% 4.88% – 5.00% 3.16% – Borrowings 11.09% 6.87% 12.00% 11.38% 5.02% 11.20% Sensitivity of the consolidated profit or loss is the effect of the assumed changes in interest rates on the interest expense for the year. During the year ended 31 December 2018 and 2017 sensitivity analysis did not reveal any significant potential effect on the Group’s equity. The following table demonstrates sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s consolidated profit or loss: Sensitivity of Increase in interest basis points expense 31 December 31 December Currency 2018 2018 US$ +1.04% 712 GEL +0.25% 560 Sensitivity of Increase in interest basis points expense 31 December 31 December Currency 2018 2018 US$ -1.04% (712) GEL -0.25% (560) Sensitivity of Increase in interest basis points expense 31 December 31 December Currency 2017 2017 US$ +0.53% 389 GEL +3.50% 8,187 Sensitivity of Increase in interest basis points expense 31 December 31 December Currency 2017 2017 US$ -0.53% (389) GEL -3.50% (8,187) Currency risk The Group is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Group’s principal transactions are carried out in Georgian Lari and its exposure to foreign exchange risk arises primarily with respect to US dollar. The Group’s financial assets are primarily denominated in the same currencies as its liabilities, which is the functional currency of the Group entities – Lari. Most of the Group’s operations are denominated in Lari too. This fact mitigates the foreign currency exchange rate risk operationally. The main foreign exchange risk arises from US dollars-denominated borrowings that are partially hedged through cash deposits with banks, also denominated in US Dollars and the foreign currency forward contracts with the Group’s counterparties. The Group also hedges currency risk component of two of its fixed assets that are intended for disposal through foreign exchange-denominated borrowings (Note 3). The hedge was fully effective in 2018. The gross value of foreign exchange fluctuation hedged equalled 2018: GEL 498 gain (2017: GEL 322 loss) on both hedged items and hedging instrument. 170