Notes to Financial Statements December 31, 2010 and 2009 Core Canadian Dividend Trust [cdd.un] 11. Financial Instruments and Risk Management Interest Rate Risk Other Price Risk requirements; and (iv) if it has not complied, the consequences of such non-compliance. The Fund’s objectives, policies and processes are described in Note 2, information on the Fund’s unitholders’ equity is described in Note 5 and Note 7 and the Fund does not have any externally imposed capital requirements. The Fund’s financial instruments consist of cash, investments, certain derivative contracts, receivables and payables. In accordance with CICA Handbook Section 3862, “Financial Instruments – Disclosures”, the Fund uses a three-tier hierarchy as a framework for disclosing fair value based on inputs used to value the Fund’s investments. The hierarchy of inputs is summarized below: The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund’s investments and derivatives carried at fair value: The following is a summary of the inputs used as of December 31, 2009 in valuing the Fund’s investments and derivatives carried at fair value: There were no transfers between Level 1 and Level 2 during 2010 and 2009. As a result, the Fund is exposed to various types of risks that are associated with its investment strategies, financial instruments and markets in which it invests. The most important risks include other price risk, liquidity risk, interest rate risk and credit risk. These risks and related risk management practices employed by the Fund are discussed below: Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate or currency risk), whether caused by factors specific to an individual investment, its issuer, or all factors affecting all instruments traded in a market or segment. The Fund’s most significant exposure to other price risk arises from its investments in equity securities. Net assets per unit varies as the value of the securities in the Fund varies. The Fund has no control over the factors that affect the value of the securities in the Fund, including factors that affect all of the Canadian securities. The Fund’s market risk is managed by taking a long-term perspective and utilizing an option writing program. Approximately 117 percent (2009 - 113 percent) of the Fund’s net assets held at December 31, 2010 were publicly traded equities. If equi- ty prices on the exchange increased or decreased by 10 percent as at December 31, 2010, the net assets of the Fund would have increased or decreased by $1.6M (2009 - $1.9M) respectively or 11.7 percent (2009 - 11.3 percent) of the net assets, all other factors remaining constant. In practice, actual trading results may differ and the difference could be material. The Fund may, from time to time, write covered call options in respect of all or part of the common shares in the Fund. In addition, the Fund may write cash covered put options in respect of securities in which the Fund is permitted to invest. The Fund is subject to the risk of its investment position including those securities that are subject to outstanding call options and those securities underlying put options written by the Fund, should the market price of such securities decline. In addition, the Fund will not participate in any gain on the securities that are subject to out- standing call options above the strike price of such options. The Fund may also purchase put options. The Fund has downside risk on invested positions which may be partially mitigated by the use of purchased put options. The risk to the Fund with respect to purchased put options is limited to the premiums paid to purchase the put options. Liquidity Risk Liquidity risk is the possibility that investments in the Fund cannot be readily converted into cash when required. To manage this risk, the Fund invests the majority of its assets in investments that are trad- ed in an active market and which can be easily disposed. In addition, the Fund aims to retain sufficient cash and short-term investments to maintain liquidity and to meet its obligations when due. Liabilities are payable within one year. Cash is required to fund redemptions. Unitholders must surrender units at least 10 business days prior to the last day of the month and receive payment on or before 15 calendar days following the month end valuation date. Therefore the Fund has a maximum of 21 business days to generate sufficient cash to fund redemptions mitigating liquidity issues. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of a financial instrument. The financial instruments which potentially expose the Fund to interest rate risk are the short term fixed income securities. The Fund has minimal sensitivity to change in rates since securities are usually held to maturity and are short-term in nature. Short-Term Investments $ – $ 1,647,993 $ – $ 1.647,993 Canadian Common Shares 16,267,807 – – $ 16,267,807 Options – (18,922) – $ (18,922) Total Investments $ 16,267,807 $ 1,629,071 $ – $ 17,896,878 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total Short-Term Investments $ – $ 1,909,383 $ – $ 1,909,383 Canadian Common Shares 19,414,832 – – $ 19,414,832 Total Investments $ 19,414,832 $ 1,909,383 $ –$ 21,324,215 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (1) Level 1 - for unadjusted quoted prices in active markets for identi- cal assets or liabilities, (2) Level 2 - for inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices), and (3) Level 3 - for inputs that are based on unobservable market data. 17 Annual Report 2010