BT 1998 Annual Report Download - page 62

O T E S T O T H E F I N A N C I A L S TAT E M E N T S
18. Loans and other bor rowings (continued)
(a) Average effective interest rates
The average interest rates on page 61 take into account the effect of interest rate swaps. The interest basis of interest rate swap
agreements used, the notional amounts, their average maturities and weighted average interest rates are shown below:
Average Average
interest interest
Notional receivable payable
Average amount rate rate
maturity £m % %
)))))))))%!!!!05111!!!0111!!!0111!!!0111
Pay fixed interest and receive variable interest Over 5 years 1,124 6.2 8.5
Pay variable interest and receive fixed interest Under 5 years 365 9.5 7.4
00000000051!!!05111!!!0111!!!0111!!!0111
The rates of the variable rate portion of the swaps are based on quoted rates. In calculating the average variable rates, the latest
rates agreed with the counterparty on each swap have been used. Changes in interest rates will affect the variable-rate
information disclosed above.
(b) Unused committed lines of credit for short-term financing available at 31 March 1998 totalled approximately £786m, which was
in support of a commercial paper programme or other borrowings. These lines of credit are normally available for up to one year.
19. Financial instruments and risk management
The group uses derivative financial instruments primarily to manage its exposure to market risks from changes in interest and
foreign exchange rates. There has been no change in the risk profile between the year end and the date of these financial
statements.
The notional amounts of derivatives summarised below do not necessarily represent amounts exchanged by the parties and,
thus, are not a measure of the exposure of the group through its use of derivatives. The amounts exchanged are calculated on
the notional amounts and other terms of the derivatives which relate to interest and exchange rates.
(a) Interest rate risk management
The group has entered into interest rate swap agreements with commercial banks and other institutions to vary the amounts
and periods for which interest rates on borrowings are fixed. By swapping fixed rates on long-term borrowings into floating
rates, the group has obtained lower floating-rate borrowings than those available if borrowing directly at a floating rate. Under
interest rate swaps, the group agrees with other parties to exchange, at specified intervals, the difference between fixed rate
and floating rate interest amounts calculated by reference to an agreed notional principal amount.
At 31 March 1998, the group had outstanding interest rate swap agreements having a total notional principal amount of
£1,489m (1997 – £1,247m).
(b) Foreign exchange risk management
Cross currency swaps and forward foreign exchange contracts have been entered into to reduce the foreign currency exposure
on the group’s operations and the group’s net assets. The group also enters into forward foreign exchange contracts to hedge
investments, interest expense and purchase and sale commitments denominated in foreign currencies (principally US dollars).
The terms of the currency swaps are up to 20 years and the terms of currency forward exchange contracts are typically less than
one year. The purpose of the group’s foreign currency hedging activities is to protect the group from the risk that the eventual
net inflows and net outflows will be adversely affected by changes in exchange rates.
At 31 March 1998, the group had outstanding foreign currency swap agreements and forward exchange contracts having a
total notional principal amount of £4,476m (1997 – £2,541m).
The fair values of foreign currency contracts at 31 March 1998 were £3,037m (1997 – £1,071m) for purchases of currency and
£892m (1997 – £683m) for sales of currency. These fair values have been estimated by calculating their present values using
the market discount rates, appropriate to the terms of the contracts, in effect at the balance sheet dates.
At 31 March 1998, the group had deferred unrealised gains of £nil (1997 – £21m) and losses of £36m (1997 – £7m), based on
dealer-quoted prices, from hedging purchase and sale commitments. At 31 March 1998, the group also had deferred realised
net losses of £12m (1997 – £36m net losses). These are included in the profit and loss account as part of the purchase or sale
transaction when it is recognised, or as gains or losses when a hedged transaction is no longer expected to occur.