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64 National Grid Gas plc Annual Report and Accounts 2009/10
28. Financial risk
(a) Market risk
(i) Foreign exchange risk
2010
Sterling Euro US dollar Other Total
£m £m £m £m £m
Cash and cash equivalents 1---1
Financial investments 326 - - - 326
Borrowings* (5,510) (1,119) (713) (330) (7,672)
Pre-derivative position (5,183) (1,119) (713) (330) (7,345)
Derivative effect (1,687) 1,129 714 330 486
Net debt position (6,870) 10 1 - (6,859)
2009
Sterling Euro US dollar Other Total
£m £m £m £m £m
Cash and cash equivalents -----
Financial investments 1,008 1 - - 1,009
Borrowings* (6,296) (1,323) (793) (260) (8,672)
Pre-derivative position (5,288) (1,322) (793) (260) (7,663)
Derivative effect (1,582) 1,332 773 260 783
Net debt position (6,870) 10 (20) - (6,880)
*Includes bank overdrafts
During the years ended 31 March 2010 and 2009, derivative financial instruments were used to manage foreign exchange risk as follows:
There was no significant currency exposure on other financial instruments, including trade receivables and payables and other receivables
and payables.
Our activities expose us to a variety of financial risks: market risk (including foreign exchange risk; fair value interest rate risk and cash flow
interest rate risk), credit risk and liquidity risk. The overall risk management programme focuses on the unpredictability of financial markets
and seeks to minimise potential adverse effects on financial performance. Derivative financial instruments are used to hedge certain risk
exposures.
Risk management related to financial activities is carried out by a central treasury department under policies approved by the Boards of
Directors of National Grid plc and NGG. This department identifies, evaluates and hedges financial risks in close co-operation with the
operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as
foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and
investment of excess liquidity as discussed further in our treasury policy, described on page 19 of the Operating and Financial Review.
NGG is exposed to foreign exchange risk arising from non-sterling future commercial transactions and non-sterling recognised assets and
liabilities.
With respect to near term foreign exchange risk, we use foreign exchange forwards to manage foreign exchange transaction exposure. Our
policy is to hedge a minimum percentage of known contracted foreign currency flows in order to mitigate foreign currency movements in the
intervening period. Where cash forecasts are less certain, we generally cover a percentage of the foreign currency flows depending on the
level of agreed probability for those future cash flows.