Telstra 2009 Annual Report Download - page 162

Telstra Corporation Limited and controlled entities
147
Notes to the Financial Statements (continued)
(a) Risk and mitigation (continued)
(i) Interest rate risk (continued)
(*) The average rate is calculated as the weighted average (based on
principal / notional value) effective interest rate.
(#) These instruments are used to hedge our net foreign investments.
(^) Rates on cash at bank balances represent average rates earned on
net positive cash balances after taking into account bank set-off
arrangements.
(ii) Sensitivity analysis - interest rate risk
The sensitivity analysis included in this section is based on the interest
rate risk exposures on our net debt portfolio as at balance date. Our
net debt portfolio at balance date does not differ significantly from
our average net debt portfolio during the year.
A sensitivity of plus or minus 10 per cent has been selected as this is
considered reasonable given the current level of both short term and
long term Australian dollar interest rates. For example, a 10 per cent
increase would move short term interest rates (cash) at 30 June 2009
from 3.00% (2008: 7.25%) to 3.30% (2008: 7.975%) representing a 30
(2008: 72.5) basis points shift. This basis points shift is considered
reasonable taking into account the absolute rates as at 30 June and
current market conditions.
The results in this sensitivity analysis reflect the net impact on a
hedged basis which will be primarily reflecting the Australian dollar
floating or Australian dollar fixed position from our cross currency and
interest rate swap hedges and therefore the movement in the
Australian dollar interest rates is an important assumption in this
sensitivity analysis.
Based on the sensitivity analysis, equity would be affected by the
revaluation of our derivatives associated with borrowings designated
in a cash flow hedge relationship and finance costs would be impacted
by the following:
• the impact on interest expense being incurred on our net floating
rate Australian dollar positions during the year;
• the revaluation of our derivatives associated with borrowings de-
designated from a fair value hedge relationship or not in a hedge
relationship; and
• the ineffectiveness resulting from the change in fair value of both
our derivatives and borrowings which are designated in a fair value
hedge.
These first two factors above partially offset the third factor. For
example, if interest rates were 10% higher, the increase in interest on
floating rate debt, and the reduction of our derivatives associated
with borrowing de-designated from a fair value hedge relationship or
not in a hedge relationship, results in an increase in expense and the
ineffectiveness component from our fair value hedges results in a
gain.
The carrying value of borrowings de-designated from fair value hedge
relationships or not in a hedge relationship is not adjusted for fair
value movements attributable to interest rate risk. Accordingly, the
revaluation gain or loss on our derivatives associated with these
borrowings will not have an offsetting gain or loss attributable to
interest rate movements on the underlying borrowing.
It is important to note that this sensitivity analysis does not include
the effect of movements in Telstra’s borrowing margins. Whilst
margins will be affected by market factors, this risk variable
predominantly reflects Telstra specific credit risk and accordingly is
not considered a market risk. Furthermore, determining a reasonably
possible change in this risk variable with sufficient reliability is
impractical particularly given current financial market conditions.
Therefore, the following sensitivity analysis assumes a constant
margin and parallel shifts in interest rates across all currencies.
18. Financial risk management (continued)