Telstra 2009 Annual Report Download - page 160

Telstra Corporation Limited and controlled entities
145
Notes to the Financial Statements (continued)
Financial risk management
We undertake transactions in a range of financial instruments
including:
• cash assets;
• receivables;
• payables;
• deposits;
• bills of exchange and promissory notes;
• listed investments and investments in other corporations;
• various forms of borrowings, including medium term notes,
promissory notes, bank loans and private placements; and
• derivatives.
Our activities result in exposure to operational risk and a number of
financial risks, including market risk (interest rate risk, foreign
currency risk), credit risk and liquidity risk. Our investments in listed
and unlisted securities are immaterial and hence we are not exposed
to equity securities price risk.
Our overall risk management program seeks to mitigate these risks
and reduce volatility on our financial performance and support the
delivery of our financial targets. We manage our risks with a view to
the outcomes of both our financial results and the underlying
economic position. Financial risk management is carried out centrally
by our Treasury department, which is part of our corporate areas,
under policies approved by the Board of Directors. 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 the investment of excess
liquidity.
We enter into derivative transactions in accordance with Board
approved policies to manage our exposure to market risks and
volatility of financial outcomes that arise as part of our normal
business operations. These derivative instruments create an
obligation or right that effectively transfers one or more of the risks
associated with an underlying financial instrument, asset or
obligation. Derivative instruments that we use to hedge risks such as
interest rate and foreign currency movements include:
• cross currency swaps;
• interest rate swaps; and
• forward foreign currency contracts.
We do not speculatively trade in derivative instruments. Our
derivative transactions are entered into to hedge the risks relating to
underlying physical positions arising from our business activities.
Section (a) of this note sets out the key financial risk factors that arise
from our activities, including our policies for managing these risks.
Section (b) provides details of our hedging strategies that are used for
financial risk management. In particular, this section provides
additional context around our hedge transactions and the resulting
economic and risk positions.
(a) Risk and mitigation
The risks associated with our main financial instruments and our
policies for minimising these risks are detailed below. These risks
comprise market risk, credit risk and liquidity risk.
Market risk
Market risk is the risk that the fair value or future cash flows of our
financial instruments will fluctuate because of changes in market
prices. Components of market risk to which we are exposed are
discussed below.
(i) Interest rate risk
Interest rate risk refers to the risk that the value of a financial
instrument or cash flows associated with the instrument will fluctuate
due to changes in market interest rates.
Interest rate risk arises from interest bearing financial assets and
liabilities that we use. Non derivative interest bearing assets are
predominantly short term liquid assets. Our interest rate liability risk
arises primarily from long term foreign debt issued at fixed rates
which exposes us to fair value interest rate risk. Our borrowings which
have a variable interest rate attached gives rise to cash flow interest
rate risk.
Our debt is sourced from a number of financial markets covering
domestic and offshore, short term and long term funding. The
majority of our debt consists of foreign currency denominated
borrowings. We manage our debt in accordance with targeted
currency, interest rate, liquidity, and debt portfolio maturity profiles.
Specifically, we manage interest rate risk on our net debt portfolio by:
• adjusting the ratio of fixed interest debt to variable interest debt to
our target ratio, as required by our debt management policy;
• ensuring access to diverse sources of funding;
• reducing risks of refinancing by establishing and managing in
accordance with target maturity profiles; and
• undertaking hedging activities through the use of derivative
instruments.
Under our interest rate swaps we agree with other parties to
exchange, at specified intervals (mainly quarterly), the difference
between fixed contract rates and floating rate interest amounts
calculated by reference to the agreed notional principal amounts.
Refer to note 17 Table F for our residual post hedge fixed and floating
interest positions on a contractual face value basis.
We hedge interest rate and currency risk on most of our foreign
currency borrowings by entering into cross currency principal swaps
and interest rate swaps when required, which have the economic
effect of converting foreign currency borrowings to Australian dollar
borrowings. ‘Hedging strategies’ contained in section (b) of this note
provides further information.
18. Financial risk management