The Group, via the subsidiaries, operates across Europe and invests in loans that are denominated in currencies other than the functional currency of the Company. Consequently the Group is exposed to risks arising from foreign exchange rate fluctuations in respect of these loans and other assets and liabilities which relate to currency flows from revenues and expenses. Exposure to foreign currency risk is hedged and monitored by the Investment Manager on an ongoing basis and is reported to the Board accordingly.

The Group and Lloyds Bank plc entered into an international forward exchange master agreement dated 5 April 2013 and on 7 February 2014 the Group entered into a Professional Client Agreement with Goldman Sachs, pursuant to which the parties can enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate between Sterling and other currencies. The Group does not trade in derivatives but holds them to hedge specific exposures and have maturities designed to match the exposures they are hedging. The derivatives are held at fair value which represents the replacement cost of the instruments at the reporting date and movements in the fair value are included in the Consolidated Statement of Comprehensive Income under net foreign exchange losses/ (gains). The Group does not adopt hedge accounting in the financial statements. At the end of the reporting period the Group had 138 (2019: 113) open forward contracts.

As at 31 December 2020 the Group had the following currency exposure: 


                                                      Danish Krone Sterling     Euro        Total 
31 December 2020                                      GBP            GBP            GBP           GBP 
Assets 
Loans advanced                                        -            184,576,296  258,083,353 442,659,649 
Financial assets at fair value through profit or loss -            918,259      -           918,259 
Other receivables and prepayments                     -            17,094       -           17,094 
Cash and cash equivalents                             422          2,409,377    529,609     2,939,408 
Liabilities 
Revolving credit facility                             -            (18,626,837) -           (18,626,837) 
Trade and other payables                              -            (1,123,070)  (86,996)    (1,210,066) 
Net currency exposure                                 422          168,171,119  258,525,966 426,697,507 
                                                      Danish Krone Sterling    Euro         Total 
31 December 2019                                      GBP            GBP           GBP            GBP 
Assets 
Loans advanced                                        -            125,736,298 264,911,218  390,647,516 
Financial assets at fair value through profit or loss -            30,480,689  -            30,480,689 
Other receivables and prepayments                     -            28,935      -            28,935 
Cash and cash equivalents                             671          6,566,136   30,226,867   36,793,674 
Liabilities 
Revolving credit facility                             -            -           (28,359,047) (28,359,047) 
Trade and other payables                              -            (139,704)   (2,896,982)  (3,036,686) 
Net currency exposure                                 671          162,672,354 262,522,154  426,555,081

Currency sensitivity analysis

Should the exchange rate of the Euro against Sterling increase or decrease by 10 per cent with all other variables held constant, the net assets of the Group at 31 December 2020 would increase or decrease by GBP25,852,597 (2019: GBP21,435,943). Should the exchange rate of the Danish Krone against Sterling increase or decrease by 10 per cent with all other variables held constant, the net assets of the Group at 31 December 2020 would increase or decrease by GBP42 (2019: GBP67). These percentages have been determined based on potential volatility and deemed reasonable by the Directors. This does not include the impact of hedges in place which would be expected to reduce the impact.

In accordance with the Group's policy, the Investment Manager monitors the Group's currency position, and the Board of Directors reviews this risk on a regular basis.

iii) Interest rate risk

Interest rate risk is the risk that the value of financial instruments and related income from loans advanced and cash and cash equivalents will fluctuate due to changes in market interest rates.

The majority of the Group's financial assets are loans advanced at amortised cost, credit linked notes (repaid in 2020 and no longer outstanding), receivables and cash and cash equivalents. The Group's investments have some exposure to interest rate risk but this is limited to interest earned on cash deposits and floating interbank rate exposure for investments designated as loans advanced. Loans advanced have been structured to include a combination of fixed and floating interest and 79.2% (2019: 79.1%) of investments designed as loans advanced at 31 December 2020 have a floating interbank interest rate. The interest rate risk is mitigated by the inclusion of interbank rate floors on floating rate loans, preventing interest rates from falling below certain levels.

The following table shows the portfolio profile of the financial assets at 31 December 2020: 


                                                      31 December 2020 31 December 2019 
                                                      GBP                GBP 
Floating rate 
Loans advanced(1)                                     347,477,400      309,007,305 
Cash and cash equivalents                             2,939,408        36,793,674 
Financial assets at fair value through profit or loss -                21,885,611 
Fixed rate 
Loans advanced                                        95,182,249       81,640,211 
Total financial assets subject to interest rate risk  445,599,057      449,326,801

(1) Loans advanced at floating rates include loans with interbank rate floors.

At 31 December 2020, if interest rates had changed by 50 basis points, with all other variables remaining constant, the effect on the net profit and equity would have been as shown in the table below: 


                                 31 December 2020 31 December 2019 
                                 GBP                GBP 
Floating rate 
Increase of 50 basis points (1)  1,752,084        1,838,433 
Decrease of 50 basis points      (1,752,084)      (1,838,433)

(1) Loans advanced at floating rates include loans with interbank rate floors.

These percentages have been determined based on potential volatility and deemed reasonable by the Directors.

b) Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group's main credit risk exposure is in the investment portfolio, shown as loans advanced at amortised cost and credit linked notes (repaid in 2020 and no longer outstanding) designated at fair value through profit or loss, where the Group invests in whole loans and also subordinated and mezzanine debt which rank behind senior debt for repayment in the event that a borrower defaults. There is a spread concentration of risk as at 31 December 2020 due to several loans being advanced since inception. There is also credit risk in respect of other financial assets as a portion of the Group's assets are cash and cash equivalents or accrued interest. The banks used to hold cash and cash equivalents have been diversified to spread the credit risk to which the Group is exposed. The Group also has credit risk exposure in its financial assets classified as financial assets through profit or loss which is diversified between hedge providers in order to spread credit risk to which the Group is exposed. At year-end our derivative exposures were with one counterparty.

With respect to the credit linked notes designated at fair value through profit or loss, the Group held junior notes linked to the performance of a portfolio of high quality UK real estate loans owned by a major commercial bank. The credit linked notes were repaid in June 2020. The transaction was structured as a synthetic securitisation with risk transfer from the bank to the Group achieved via the purchase of credit protection by the bank on the most junior tranches. The credit risk to the Group was the risk that one of the underlying borrowers defaults on their loan and the Group was required to make a payment under the credit protection agreement. Despite the different way in which the transaction was structured the Group considered the risks to be fundamentally the same as any other junior loan in the portfolio and monitored and managed this risk in the same way as the other loans advanced by the Group.

The total exposure to credit risk arises from default of the counterparty and the carrying amounts of financial assets best represent the maximum credit risk exposure at the year-end date. As at 31 December 2020, the maximum credit risk exposure was GBP446,517,316 (2019: GBP457,921,879).

The Investment Manager has adopted procedures to reduce credit risk exposure by conducting credit analysis of the counterparties, their business and reputation which is monitored on an ongoing basis. After the advancing of a loan a dedicated debt asset

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