BP 2010 Annual Report Download - page 189

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Notesonnancialstatements
Financial statements
27.Financialinstrumentsandnancialriskfactorscontinued
Thesensitivitiesforriskmanagementactivityandembeddedderivativesarehypotheticalandshouldnotbeconsideredtobepredictiveoffuture
performance.Inaddition,forthepurposesofthisanalysis,intheabovetable,theeffectofavariationinaparticularassumptiononthefairvalueofthe
embeddedderivativesiscalculatedindependentlyofanychangeinanotherassumption.Inreality,changesinonefactormaycontributetochangesin
another,whichmaymagnifyorcounteractthesensitivities.Furthermore,theestimatedfairvaluesasdisclosedshouldnotbeconsideredindicativeof
futureearningsonthesecontracts.
(ii) Foreign currency exchange risk
Wherethegroupentersintoforeigncurrencyexchangecontractsforentrepreneurialtradingpurposestheactivityiscontrolledusingtradingvalue-at-risk
techniquesasexplainedabove.Thisactivityisincludedwithinoilpricetradinginthevalue-at-risktableabove.
SinceBPhasglobaloperations,uctuationsinforeigncurrencyexchangeratescanhavesignicanteffectsonthegroup’sreportedresults.The
effectsofmostexchangerateuctuationsareabsorbedinbusinessoperatingresultsthroughchangingcostcompetitiveness,lagsinmarketadjustmentto
movementsinratesandtranslationdifferencesaccountedforonspecictransactions.Forthisreason,thetotaleffectofexchangerateuctuationsisnot
identiableseparatelyinthegroup’sreportedresults.Themainunderlyingeconomiccurrencyofthegroup’scashowsistheUSdollar.ThisisbecauseBP’s
majorproduct,oil,ispricedinternationallyinUSdollars.BP’sforeigncurrencyexchangemanagementpolicyistominimizeeconomicandmaterial
transactionalexposuresarisingfromcurrencymovementsagainsttheUSdollar.Thegroupco-ordinatesthehandlingofforeigncurrencyexchangerisks
centrally,bynettingoffnaturally-occurringoppositeexposureswhereverpossible,andthendealingwithanymaterialresidualforeigncurrencyexchangerisks.
Thegroupmanagestheseexposuresbyconstantlyreviewingtheforeigncurrencyeconomicvalueatriskandaimstomanagesuchrisktokeepthe
12-monthforeigncurrencyvalueatriskbelow$200million.At31December2010,theforeigncurrencyvalueatriskwas$81million(2009$140million).
Atnopointoverthepastthreeyearsdidthevalueatriskexceedthemaximumrisklimit.Themostsignicantexposuresrelatetocapitalexpenditure
commitmentsandotherUKandEuropeanoperationalrequirements,forwhichahedgingprogrammeisinplaceandhedgeaccountingisclaimedas
outlinedinNote34.
ForhighlyprobableforecastcapitalexpendituresthegrouplocksintheUSdollarcostofnon-USdollarsuppliesbyusingcurrencyforwardsand
futures.Themainexposuresaresterling,euro,Norwegiankrone,Australiandollar,KoreanwonandSingaporedollarandat31December2010open
contractswereinplacefor$989millionsterling,$115millioneuro,$212millionNorwegiankroneand$143millionAustraliandollarcapitalexpenditures
maturingwithinveyears,withover80%ofthedealsmaturingwithintwoyears(2009$800millionsterling,$491millionCanadiandollar,$299million
euro,$240millionNorwegiankrone,$215millionAustraliandollar,$51millionKoreanwonand$41millionSingaporedollarcapitalexpendituresmaturing
withinsixyearswithover65%ofthedealsmaturingwithintwoyears).
ForotherUK,European,CanadianandAustralianoperationalrequirementsthegroupusescylindersandcurrencyforwardstohedgetheestimated
exposuresona12-monthrollingbasis.At31December2010,theopenpositionsrelatingtocylindersconsistedofreceivesterling,payUSdollar,
purchasedcallandsoldputoptions(cylinders)for$1,340million(2009$1,887million);receiveeuro,payUSdollarcylindersfor$650million(2009
$1,716million);receiveAustraliandollar,payUSdollarcylindersfor$286million(2009$297million).At31December2010theopenpositionsrelatingto
currencyforwardsconsistedofbuysterling,sellUSdollarcurrencyforwardsfor$925million(2009nil);buyEuro,sellUSdollarcurrencyforwardsfor
$630million(2009nil);andbuyCanadiandollar,sellUSdollar,currencyforwardsfor$162million(2009nil).
Inaddition,mostofthegroup’sborrowingsareinUSdollarsorarehedgedwithrespecttotheUSdollar.At31December2010,thetotalforeign
currencynetborrowingsnotswappedintoUSdollarsamountedto$652million(2009$465million).Ofthistotal,$125millionwasdenominatedin
currenciesotherthanthefunctionalcurrencyoftheindividualoperatingunitbeingentirelyCanadiandollars(2009$113million,beingentirelyCanadian
dollars).Itisestimatedthata10%changeinthecorrespondingexchangerateswouldresultinanexchangegainorlossintheincomestatementof
$12million(2009$11million).
(iii) Interest rate risk
Wherethegroupentersintomoneymarketcontractsforentrepreneurialtradingpurposestheactivityiscontrolledusingvalue-at-risktechniquesas
describedabove.Thisactivityisincludedwithinoilpricetradinginthevalue-at-risktableabove.
BPisalsoexposedtointerestrateriskfromthepossibilitythatchangesininterestrateswillaffectfuturecashowsorthefairvaluesofitsnancial
instruments,principallynancedebt.
Whilethegroupissuesdebtinavarietyofcurrenciesbasedonmarketopportunities,itusesderivativestoswapthedebttoaoatingrateexposure,
mainlytoUSdollaroating,butincertaindenedcircumstancesmaintainsaUSdollarxedrateexposureforaproportionofdebt.Theproportionof
oatingratedebtnetofinterestrateswapsat31December2010was67%oftotalnancedebtoutstanding(200963%).Theweightedaverageinterest
rateonnancedebtat31December2010is2%(20092%)andtheweightedaveragematurityofxedratedebtisveyears(2009fouryears).
Thegroup’searningsaresensitivetochangesininterestratesontheoatingrateelementofthegroup’snancedebt.Iftheinterestrates
applicabletooatingrateinstrumentsweretohaveincreasedby1%on1January2011,itisestimatedthatthegroup’sprotbeforetaxationfor2011
woulddecreasebyapproximately$303million(2009$219milliondecreasein2010).Thisassumesthattheamountandmixofxedandoatingratedebt,
includingnanceleases,remainsunchangedfromthatinplaceat31December2010andthatthechangeininterestratesiseffectivefromthebeginning
oftheyear.Wheretheinterestrateapplicabletoaninstrumentisresetduringaquarteritisassumedthatthisoccursatthebeginningofthequarterand
remainsunchangedfortherestoftheyear.Inreality,thexed/oatingratemixwilluctuateovertheyearandinterestrateswillchangecontinually.
Furthermore,theeffectonearningsshownbythisanalysisdoesnotconsidertheeffectofanyotherchangesingeneraleconomicactivitythatmay
accompanysuchanincreaseininterestrates.
(iv) Equity price risk
Thegroupholdsequityinvestments,typicallymadeforstrategicpurposes,thatareclassiedasnon-currentavailable-for-salenancialassetsandare
measuredinitiallyatfairvaluewithchangesinfairvaluerecognizedinothercomprehensiveincome.Accumulatedfairvaluechangesarerecycledtothe
incomestatementondisposal,orwhentheinvestmentisimpaired.Noimpairmentlosseshavebeenrecognizedin2010(2009niland2008$546million)
relatingtolistednon-currentavailable-for-saleinvestments.ForfurtherinformationseeNote28.
At31December2010,itisestimatedthatanincreaseof10%inquotedequitypriceswouldresultinanimmediatecredittoothercomprehensive
incomeof$95million(2009$130millioncredittoothercomprehensiveincome),whilstadecreaseof10%inquotedequitypriceswouldresultinan
immediatechargetoothercomprehensiveincomeof$95million(2009$130millionchargetoothercomprehensiveincome).BPhasderivativepositions
thatresultinoppositeimpactssuchthata10%increaseinequitypriceswouldresultinachargetoprotorlossof$70million(2009nil)anda10%
decreaseinequitypriceswouldresultinagaintoprotorlossof$67million(2009nil).
BPAnnualReportandForm20-F2010 187