Barclays 2011 Annual Report Download - page 130

Risk management
Market risk continued
Foreign exchange risk (audited)
The Group is exposed to two sources of foreign exchange risk.
a) Transactional foreign currency exposure
Transactional foreign exchange exposures represent exposure on banking assets and liabilities, denominated in currencies other than the functional
currency of the transacting entity. The Group’s risk management policies prevent the holding of significant open positions in foreign currencies outside
the trading portfolio managed by Barclays Capital which is monitored through DVaR.
There were no material net transactional foreign currency exposures outside the trading portfolio at either 31 December 2011 or 2010. Due to the low
level of non-trading exposures no reasonably possible change in foreign exchange rates would have a material effect on either the Group’s profit or
movements in equity for the year ended 31 December 2011 or 2010.
b) Translational foreign exchange exposure
The Group’s investments in overseas subsidiaries and branches create capital resources denominated in foreign currencies principally US$, Euro and
South African Rand. Changes in the Sterling value of the investments due to foreign currency movements are captured in the currency translation
reserve, resulting in a movement in Core Tier 1 capital.
During 2011, total structural currency exposures net of hedging instruments increased from £15.3bn to £16.7bn, driven by redemption of $2bn Reserve
Capital Instruments that formed part of the economic hedges. Structural currency exposures pre economic hedges remained broadly flat. US$
exposures increased by $8bn due to the restructuring of our holding in BlackRock, Inc from a GBP entity to a US$ entity, offset by the increase in USD
derivatives which hedge net investments. South African Rand exposures increased £1.1bn as a result of a reduction in the hedging of the investment in
Absa Group. Euro exposures reduced by £0.8bn driven by the Spain goodwill write off, which had no impact on Euro denominated Core Tier 1 capital
as goodwill is deducted for regulatory capital purposes.
Functional currency of operations (audited)
Foreign
currency
net
investments
£m
Borrowings
which hedge
the net
investments
£m
Derivatives
which hedge
the net
investments
£m
Structural
currency
exposures
pre economic
hedges
£m
Economic
hedges
£m
Remaining
structural
currency
exposures
£m
As at 31 December 2011
US Dollar 30,335 7,217 8,094 15,024 5,072 9,952
Euro 6,568 4,096 280 2,192 2,017 175
Rand 4,258 – – 4,258 – 4,258
Japanese Yen 681 293 336 52 – 52
Other 3,144 – 930 2,214 – 2,214
Total 44,986 11,606 9,640 23,740 7,089 16,651
As at 31 December 2010
US Dollar 22,646 7,406 – 15,240 6,330 8,910
Euro 7,327 3,072 1,294 2,961 2,069 892
Rand 4,826 – 1,626 3,200 – 3,200
Japanese Yen 5,304 3,603 1,683 18 – 18
Swiss Franc 152 – 157 (5) – (5)
Other 3,139 – 824 2,315 – 2,315
Total 43,394 14,081 5,584 23,729 8,399 15,330
The economic hedges primarily represent the US Dollar and Euro Preference Shares and Reserve Capital Instruments in issue that are treated as equity
under IFRS, and do not qualify as hedges for accounting purposes. During the year $2bn Reserve Capital Instruments were redeemed.
The impact of a change in the exchange rate between Sterling and any of the major currencies would be:
– A higher or lower Sterling equivalent value of non-Sterling denominated capital resources and risk weighted assets. This includes a higher or lower
currency translation reserve within equity, representing the retranslation of non-Sterling subsidiaries, branches and associated undertakings net of
the impact of foreign exchange rate changes on derivatives and borrowings designated as hedges of net investments;
– A higher or lower profit after tax, arising from changes in the exchange rates used to translate items in the consolidated income statement; and
– A higher or lower value of available for sale investments denominated in foreign currencies, impacting the available for sale reserve.
128 Barclays PLC Annual Report 2011 www.barclays.com/annualreport