INTEREST RATE RISK The Group’s bank borrowings incur variable interest rate charges. The Group’s policy aims to manage the interest cost of the Group within the constraints of its financial covenants. The Group will continue to monitor movements in the interest rate swap market. During the period, if Libor interest rates had been 10 basis points higher with all other variables held constant, post-tax profit would have been the same (2020: £0.7m lower) as there would have been no impact on post-tax profit. FOREIGN CURRENCY RISK All of the Group’s revenues are in sterling. The majority of purchases are also in pounds sterling, but some goods purchased direct from overseas suppliers are paid for in US dollars, accounting for just over 30% (2020: 20%) of stock purchases in the period ended 26 June 2021. The Group uses various means to cover its exposure to US dollars including holding US dollar cash balances and taking out forward foreign exchange contracts for the purchase of US dollars. All the Group’s foreign exchange transactions are designed to satisfy US dollar denominated liabilities. The maximum level of hedging coverage which will be undertaken is 100% of anticipated expenditure on a three month horizon, stepping down to 75% on a four- to 12-month horizon and 50% on a 13- to 18-month horizon. There is a low level of coverage beyond the 18 month horizon. Cash flow hedges are in place to manage foreign exchange rate risk arising from forecast purchases denominated in US dollars. At the Consolidated Statement of Financial Position date, the fair value of US dollar foreign exchange forward contracts held in cash flow hedges was a £5.2m liability (2020: £6.6m asset) which relates to a commitment to purchase $242.0m (2020: $159.0m) for a fixed sterling amount. A fair value loss of £17.7m (2020: £6.8m gain) was recognised in other comprehensive income and no loss (2020: nil) was recognised on cash flow hedges during the period. In the period, a loss of £5.9m (2020: £6.4m gain) was recycled from the cash flow hedge reserve to inventory to offset foreign exchange movements on purchases. The remaining hedge reserve balance will be recycled to the Consolidated Income Statement to offset future purchases occurring after the Consolidated Statement of Financial Position date, the majority of which expire in the next 12 months. The outstanding US dollar liabilities at the period end were $0.1m (2020: $0.1m). In the event of a significant adverse movement in the US dollar exchange rate, the Group could seek to minimise the impact on profitability by changing the selling price of goods, renegotiating terms with suppliers or sourcing from alternative markets. At the period end if GBP had strengthened by 10% against US dollar with all other variables held constant, post-tax profit would have been £1.5m higher (2020: £1.9m higher) as a result of foreign exchange gains on translation of US dollar denominated trade payables and cash and cash equivalents. Other components of equity would have been £4.2m lower (2020: £0.4m higher) as a result of a decrease in fair value of derivatives designated as cash flow hedges. Conversely, if GBP had weakened by 10% against US dollar with all other variables held constant, post-tax profit for the period would have been £1.2m lower (2020: £2.4m lower) and other components of equity would have been £6.3m higher (2020: £4.0m lower). The US dollar period end exchange rate applied in the above analysis is £1=$1.3877 (2020: £1=$1.2332). CAPITAL MANAGEMENT The Group considers equity plus debt as capital. There are no externally imposed capital requirements on the Group. The Board’s objective with respect to capital management is to ensure the Group continues as a going concern in order to optimise returns to shareholders. The Board’s policy is to retain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development. The Board regularly monitors the level of capital in the Group to ensure that this can be achieved. From time to time the Group purchases its own shares on the market. These shares are intended to be used for issuing shares under the Group’s share option programmes. The Board has authorised a share purchase programme designed to ensure that all options expected to vest under share option schemes can be fulfilled out of treasury shares. DUNELM GROUP PLC ANNUAL REPORT & ACCOUNTS 2021 207 FINANCIAL STATEMENTSSTRATEGIC REPORTGOVERNANCE OTHER INFORMATION