Carphone Warehouse 2016 Annual Report Download - page 136

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Notes to the Group financial statements
134
26 Financial risk management and derivative financial instruments continued
b) Foreign exchange risk
The Group undertakes certain transactions that are denominated in foreign currencies and as a consequence has exposure to
exchange rate fluctuations. These exposures primarily arise from inventory purchases, with most of the Group’s exposure being
to Euro, Norwegian Krone and US Dollar fluctuations. The Group uses spot and forward currency contracts to mitigate these
exposures, with such contracts designed to cover exposures ranging from one month to one year.
The translation risk on converting overseas currency profits or losses is not hedged and such profits or losses are converted into
Sterling at average exchange rates throughout the year. The Group’s principal translation currency exposures are the Euro and
Norwegian Krone.
At 30 April 2016, the total notional principal amount of outstanding currency contracts was £2,856 million (2015: £1,540 million)
and had a fair value of £23 million (2014/15: £11 million). Monetary assets and liabilities and foreign exchange contracts are
sensitive to movements in foreign exchange rates. This sensitivity can be analysed in comparison to year-end rates (assuming all
other variables remain constant) as follows:
Year ended
30 April 2016
13 months ended
2 May 2015
Effect on
Headline
profit
before tax
£million
Effect on
total equity
£million
Effect on
Headline
profit
before tax
£million
Effect on
total equity
£million
10% movement in the US dollar exchange rate — 5 — 5
10% movement in the Euro exchange rate — 58 — 57
10% movement in the Swedish Krona exchange rate — 2 — 4
10% movement in the Danish Krone exchange rate — 2 — 3
10% movement in the Norwegian Krone exchange rate — 6 — 3
c) Interest rate risk
The Group’s interest rate risk arises primarily on cash, cash equivalents and loans and other borrowings, all of which are at
floating rates of interest and which therefore expose the Group to cash flow interest rate risk. These floating rates are linked to
LIBOR and other interest rate bases as appropriate to the instrument and currency. Future cash flows arising from these financial
instruments depend on interest rates and periods agreed at the time of rollover. Group policy permits the use of long term
interest rate derivatives in managing the risks associated with movements in interest rates.
The effect on the income statement and equity of 1% movements in the interest rate for the currencies in which most Group
cash, cash equivalents, loans and other borrowings are denominated and on which the valuation of most derivative financial
instruments is based is as follows, assuming that the year-end positions prevail throughout the year:
Year ended
30 April 2016
13 months ended
2 May 2015
Effect on
Headline
profit
before tax
increase /
(decrease)
£million
Effect on
total equity
increase /
(decrease)
£million
Effect on
Headline
profit
before tax
increase /
(decrease)
£million
Effect on
total equity
increase /
(decrease)
£million
1% increase in the Sterling interest rate — 1 — 4
00_DC 2016 Annual Report.pdf 134 11/07/2016 18:34