BT 2013 Annual Report Download - page 155

Financial statements
153
Financial statements
26. Financial instruments and risk management continued
Hedging strategy
A significant proportion of the group’s external revenue and costs arise within the UK and are denominated in Sterling. The group’s non-UK
operations generally trade and are funded in their functional currency which limits their exposure to foreign exchange volatility. Foreign currency
borrowings used to finance the group’s operations have been predominantly swapped into Sterling using cross-currency swaps. Foreign currency
borrowings comprised:
2013 2012
At 31 March £m £m
Euro 2,690 3,341
US Dollar 3,996 3,543
Other –1
6,686 6,885
The currency profile of these borrowings after the impact of hedging is disclosed in note 24.
The group also enters into forward currency contracts to hedge foreign currency investments, interest expense, capital purchases and purchase and
sale commitments on a selective basis. The commitments hedged are principally denominated in US Dollar, Euro and Asia Pacific region currencies.
As a result, the group’s exposure to foreign currency arises mainly on its non-UK subsidiary investments and on residual currency trading flows.
Sensitivities
Foreign exchange rates
After hedging, with all other factors remaining constant and based on the composition of assets and liabilities at the balance sheet date, the group’s
exposure to foreign exchange volatility in the income statement from a 10% strengthening/weakening in Sterling against other currencies would
result in a charge/credit respectively of approximately £2m (2011/12: credit/charge of approximately £8m).
The group’s main exposure to foreign exchange volatility within shareholders’ equity (excluding translation exposures) arises from fair value
movements on derivatives held in the cash flow reserve. The majority of foreign exchange fluctuations in the cash flow reserve are recycled
immediately to the income statement to match the hedged item and therefore the group’s exposure to foreign exchange fluctuations in equity was
insignificant in both 2012/13 and 2011/12.
Liquidity risk management
Management policy
The group ensures its liquidity is maintained by entering into short, medium and long-term financial instruments to support operational and other
funding requirements. The group determines its liquidity requirements by the use of both short and long-term cash forecasts. These forecasts are
supplemented by a financial headroom analysis which is used to assess funding adequacy for at least a 12-month period. On at least an annual basis
the Board reviews and approves the maximum long-term funding of the group and on an ongoing basis considers any related matters. Short and
medium-term requirements are regularly reviewed and managed by the treasury operation within the parameters of the policies set by the Board.
Refinancing risk is managed by limiting the amount of borrowing that matures within any specified period and having appropriate strategies in
place to manage refinancing needs as they arise. The maturity profile of the group’s loans and borrowings at 31 March 2013 is disclosed in note 24.
The group has term debt maturities of £0.3bn in 2013/14.
During 2012/13 and 2011/12 the group issued commercial paper and held cash, cash equivalents and current investments in order to manage
short-term liquidity requirements. At 31 March 2013 the group has undrawn committed borrowing facilities of £1.5bn (2011/12: £1.5bn)
maturing in March 2016.