VECTOR Limited

Electricity Lines Business

Notes to the Financial Statements - continued

For the year ended 31 March 2002

16. FINANCIAL INSTRUMENTS

The VECTOR Group, of which the line business is the predominant activity, is subject to financial risk as a result of its debt portfolio.

To manage and limit the effect of those financial risks, the Board of Directors of VECTOR Limited, of which the line business is the predominant activity, has approved policy guidelines and authorised the use of various financial instruments. The policies approved, and financial instruments being utilised at balance date, are outlined below.

Credit risk

Financial instruments that potentially subject the VECTOR group, of which the line business is the predominant activity, to credit risk principally consist of bank balances, money market deposits and accounts receivable.

The VECTOR group, of which the line business is the predominant activity, monitors the credit quality of the major financial institutions that are counterparties to its off-balance sheet financial instruments and does not anticipate any non-performance by the counterparties.

Maximum exposures to credit risk as at balance date are:

The above maximum exposures are net of any recognised provision for losses on these financial instruments.

Concentrations of credit risk

| Bank balances | 32,850 | 30,688 |

The line business is not exposed to any other concentrations of credit risk.

Interest rate risk

Interest rates on debt issued in the current year are generally fixed for periods of between one and three months at rates from 4.9% to 6.5% (2001: 6.4% to 6.9%). The interest rates are based on the BkBM rate plus a margin.

Interest rate swaps and forward rate agreements are used to manage the proportion of fixed rate debt to total debt. Interest rate swaps and forward rate agreements open as at 31 March 2002 have a principal of $174 million (2001: $194 million) with a cash benefit of $28.5 million (2001: $33.3 million). The VECTOR group, of which the line business is the predominant activity, pays a weighted average interest rate on open interest rate swaps and forward rate agreements of 7.1% (2001: 7.1%).

The VECTOR group, of which the line business is the predominant activity, values interest rate swaps by determining the net present value of future cash flows using current interest rates. The VECTOR group, of which the line business is the predominant activity, continuously monitors the credit quality of the major international institutions that are counterparties to its off-balance sheet financial instruments and does not anticipate non-performance by any of the counterparties.

Currency Risk

In 1997 the VECTOR group, of which the line business is the predominant activity, issued a bond in Swiss Francs. As a result of this transaction exposures to fluctuations in foreign currency exchange rates arise.

The VECTOR group, of which the line business is the predominant activity, has hedged all these borrowings in foreign currency by currency swap. Currency swaps open at balance date have a principal of $104.8 million (2001: $104.8 million). The cash benefit of the currency swaps is incorporated in the interest rate swaps. The currency swap was taken with an interest rate swap as one transaction. Valuation cannot be obtained to distinguish the two components.