Air New Zealand 2010 Annual Report Download - page 30

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17. FINANCIAL INSTRUMENTS (CONTINUED)
MARKET RISK
Foreign currency risk
Foreign currency risk is the risk of loss to Air New Zealand arising from adverse fluctuations in exchange rates.
Air New Zealand has exposure to foreign exchange risk as a result of transactions denominated in foreign currencies, arising from normal trading
activities, foreign currency borrowings and foreign currency capital commitments and sales.
Air New Zealand has a formal foreign exchange management policy (approved by the Board of Directors) to enter into foreign exchange contracts to
manage economic exposure to fluctuations in foreign exchange rates impacting operating cash flows and asset values. Any exposure to gains or losses
on these contracts is offset by a related loss or gain on the item being hedged.
Foreign currency operating cash inflows are primarily denominated in Australian Dollars, European Community Euro, Japanese Yen, United Kingdom
Pounds and United States Dollars. Foreign currency outflows are primarily denominated in United States Dollars. The Group’s treasury risk management
policy is to hedge between 75% and 95% of forecast net operating cash flows for the first 6 months, with progressive reductions in percentages
hedged in subsequent months out to 2 years. In accordance with this policy, the underlying forecast revenue and expenditure transactions in respect
of foreign currency cash flow hedges in place at reporting date, are expected to occur over the next 24 months. Where exposures are certain, such
as foreign currency borrowings and capital commitments and sales, it is the Group’s policy to elect to hedge these risks as they arise, within Board
approved parameters. The hedge accounted capital transactions will affect earnings as the underlying hedged asset is depreciated over the useful
economic life of that asset.
During the year, a proportion of United States Dollar denominated borrowings was designated as the hedging instrument in qualifying cash flow hedges
of highly probable forecast foreign currency sales of non financial assets. A further proportion of United States denominated borrowings remained
unhedged to provide a natural offset to foreign currency movements within depreciation expense, resulting from revisions made to aircraft residual values
during the year. These changes reduced the level of derivative cover required to offset the foreign exchange exposure on the remaining unhedged United
States borrowings and finance lease obligations.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising
on the net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies.
Air New Zealand’s exposure to foreign exchange risk on financial instruments outstanding at reporting date is summarised as follows:
GROUP
AS AT 30 JUNE 2010
In NZ$M NZD USD AUD EUR JPY GBP OTHER TOTAL
Foreign currency risk
Non-derivative financial instruments
Cash and cash equivalents 1,009 6 38 1 3 3 7 1,067
Other interest-bearing assets 115 - 22 - - - - 137
Trade and other receivables (excluding prepayments) 131 66 27 10 5 16 17 272
Amounts owing from associates 3 - - - - - - 3
Trade and other payables (144) (108) (55) (4) (6) (21) (14) (352)
Interest-bearing liabilities (453) (622) - - - - - (1,075)
Amounts owing to associates - (13) - - - - - (13)
Net financial position exposure before hedging activities 661 (671) 32 7 2 (2) 10 39
Foreign currency derivatives
Notional principal (NZ$M)
Cash flow hedges (1,050) 1,932 (339) (85) (143) (164) (150) 1
Non-hedge accounted (561) 621 (60) (1) - 2 - 1
Balance* (950) 1,882 (367) (79) (141) (164) (140) 41
Cash flows in respect of foreign currency cash flow hedges
are expected to occur as follows:
Not later than 1 year (759) 1,553 (296) (82) (138) (154) (132) (8)
Later than 1 year and not later than 2 years (291) 379 (43) (3) (5) (10) (18) 9
(1,050) 1,932 (339) (85) (143) (164) (150) 1
* The balance represents hedges of highly probable forecast foreign currency operating and capital expenditure transactions.
AIR NEW ZEALAND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS AT 30 JUNE 2010
28