Notes to Consolidated Financial Statements  Year ended December 31, 2011  4. Financial risk management (continued):  Foreign currency exchange rate risk and commodity price risk  As a result of the Quetico investment in the United States, the Corporation has some exposure to  foreign currency exchange rate risk. The Corporation purchased forward exchange rate contracts  matching the expected distributions in US dollars throughout 2012 and also for 90% of the expected  distributions in 2013. The Corporation intends to purchase additional contracts each quarter so that  two years of distributions would be hedged against movement in the US Dollar compared to the  Canadian dollar. The Corporation had no commodity price risk for the year ended December 31,  2011. Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market  interest rates. The Corporation is exposed to interest rate fluctuations on its bank debt that bears a  floating rate of interest. As at December 31, 2011, if interest rates had been 1% lower with all other  variables held constant, net income for the year would have been approximately $180,000 higher,  due to lower interest expense. An equal and opposite impact would have occurred to net income  had interest rates been 1% higher. The Corporation had no interest rate swap or financial contracts in place as at or during the year  ended December 31, 2011. Interest Rate Risk  Capital Management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market  confidence and to sustain future development of the business. Capital consists of share capital, a 364  day revolving credit facility and retained earnings. The Board of Directors monitors the return on  capital as well as the level of dividends to common shareholders. The Corporation manages capital by monitoring certain debt covenants set out in its credit facility.  The Corporation has a maximum senior debt to contracted EBITDA of 1.7:1 (0.15:1 at December 31,  2011). EBITDA is defined as net income before interest expense, income taxes, depreciation and  amortization and non-cash stock-based compensation expenses. Additionally, a minimum tangible  net worth requirement of $190.3 million is in place ($236.5 million at December 31, 2011). Tangible  net worth is defined as subordinated debt plus shareholders equity. The Corporation was in  compliance with all debt covenants at December 31, 2011. In order to acquire more distributions and  royalties, the Corporation can access its credit facility and above that needs to access public equity  markets to fund the acquisitions and manage the business within the bank covenants. There were no  changes in the Corporation’s approach to capital management during the year ended December 31,  2011.  Alaris Royalty Corp. 2011 Annual Report  33 