Notes to the Group annual financial statements | Note 3.3

Market risk is the risk that changes in market prices (interest rate and currency risk) will affect the Group's income or the value of its holding of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Group is exposed to risks from movements in interest rates and foreign exchange rates that affect its assets, liabilities and anticipated future transactions. The Group is not exposed to significant levels of price risk.

(i) Interest rate risk

The Group's cash flow interest rate risk arises from loans receivable, cash and cash equivalents, and borrowings carrying interest at variable rates. The Group is not exposed to fair value interest rate risk as the Group does not have any fixed interest-bearing instruments carried at fair value other than the instruments detailed in note 3.7 where the fair value risk of these instruments is detailed.

As part of the process of managing the Group's exposure to interest rate risk, interest rate characteristics of new borrowings and the refinancing of existing borrowings are positioned according to expected movements in interest rates.

The interest rate sensitivity analysis is based on the following assumptions:

• changes in market interest rates affect the interest income or expense of variable interest financial instruments; and
• changes in market interest rates only affect interest income or expense in relation to financial instruments with fixed interest rates if these are recognised at fair value.

Interest rate risk management strategy

The Prepaid Company (TPC), a wholly owned subsidiary of the Group, currently has ZAR-denominated floating rate debt instruments and is therefore exposed to variability in interest payments as a result of interest rate fluctuations. To hedge this interest rate risk, TPC took out a pay-fixed, receive-floating interest rate swap instrument in the prior year. This type of hedging relationship is a cash flow hedge. Refer to note 3.8 for more details.

The Group held the following interest rate swaps as hedging instruments in cash flow hedges of interest risk:

A reasonably possible change of 25 basis points in the interest rates at the reporting date on the interest rate swap would have increased/(decreased) equity by the following amounts:

This sensitivity analysis assumes that all other variables remain constant.

(ii) Foreign currency risk

The Group is exposed to foreign currency risk from transactions and translations. Transaction exposure arises because affiliated companies undertake transactions in currencies other than their functional currency. Translation exposure arises where affiliated companies have a functional currency other than rand.

The Group manages its exposure to foreign currency risk by ensuring that the net foreign currency exposure remains within acceptable levels. Hedging instruments may be used in certain instances to reduce risks arising from foreign currency fluctuations. The Group has reduced its foreign currency exposure substantially in the current year due to its writing off certain USD denominated loans.

In the current year, the Group incurred a foreign exchange loss of R1.2 million (2021: R61.2 million loss) mainly asa result of the Group's USD exposure.

Foreign currency sensitivity analysis

The Group has used a sensitivity analysis technique that measures the estimated change to profit or loss of aninstantaneous 10% strengthening or weakening in the rand against all other currencies, from the rate applicable at 31 May 2022, for each class of financial instrument with all other variables remaining constant. This analysis is for illustrative purposes only, as in practice, market rates rarely change in isolation.