BT 2014 Annual Report Download - page 172

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169
Financial statements
Financial statements
26. Financial instruments and risk management continued
Hedging strategy
A signicant 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 nance the group’s operations have been predominantly swapped into Sterling using cross-currency swaps.
The group also enters into forward currency contracts to hedge foreign currency, capital purchases, purchase and sale commitments, interest
expense and foreign currency investments. The commitments hedged are principally denominated in US Dollar, Euro and Asia Pacic 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 ows.
The table below reects the currency and interest rate prole of our loans and borrowings after the impact of hedging.
2014 2013
At 31 March
Fixed rate
interest
£m
Floating
rate
interest
£m
Total
£m
Fixed rate
interest
£m
Floating
rate
interest
£m
Total
£m
Sterling 7,946 1,265 9,211 7,083 1,695 8,778
Euro – 285 285 – 467 467
US Dollar – – – 6 – 6
Total 7,946 1,550 9,496 7,089 2,162 9,251
Ratio of xed to oating 84% 16% 100% 77% 23% 100%
Weighted average eective xed interest rate – Sterling 6.6% 7.1%
The oating rate loans and borrowings bear interest rates xed in advance for periods ranging from one day to one year, primarily by reference to
LIBOR and EURIBOR quoted rates.
Sensitivity analysis
The group is exposed to volatility in the income statement and shareholders’ equity arising from changes in interest rates and foreign exchange rates.
To demonstrate this volatility, management have concluded that the following are reasonable benchmarks for performing sensitivity analysis
– for interest, a 1% increase in interest rates and parallel shift in yield curves across Sterling, US Dollar and Euro currencies and
– for foreign exchange, a 10% strengthening/weakening in Sterling against other currencies.
The impact of a 1% change in interest rates on the group’s annual net nance expense was insignicant in both 2013/14 and 2012/13. The impact
on equity, before tax, of a 1% increase in interest rates is as detailed below
At 31 March
2014
£m
Increase
(Reduce)
2013
£m
Increase
(Reduce)
Sterling interest rates 337 418
US Dollar interest rates (361) (420)
Euro interest rates (14) (36)
A 1% decrease in interest rates would have broadly the same impact in the opposite direction.
The group’s exposure to foreign exchange volatility in the income statement, after hedging, and within shareholders’ equity (excluding translation
exposures) was insignicant in both 2013/14 and 2012/13.