Telstra 2013 Annual Report Download - page 134

NOTES TO THE
FINANCIAL STATEMENTS
(CONTINUED)
132 Telstra Annual Report 2013 Telstra Corporation Limited and controlled entities
(a) Risk and mitigation (continued)
Market risk (continued)
(iii) Foreign currency risk (continued)
Cash flow foreign currency risk arises primarily from foreign
currency overseas borrowings. We hedge this risk on the major part
of our foreign currency denominated borrowings by entering into a
combination of interest rate and cross currency swaps at inception
to maturity, effectively converting them to Australian dollar
borrowings. Foreign currency borrowings are not swapped into
Australian dollars where they are used as hedges for foreign
exchange exposure such as translation foreign exchange risk from
our offshore investments. Refer to note 17, Table D, for our residual
post hedge currency exposures on a contractual face value basis.
Foreign exchange risk that arises from transactional exposures
such as firm commitments or highly probable transactions settled in
a foreign currency (primarily United States dollars) are managed
principally through the use of forward foreign currency derivatives.
We hedge a proportion of these transactions (such as property,
plant and equipment and inventory purchases settled in foreign
currencies) in accordance with our risk management policy.
Foreign currency risk also arises on translation of the net assets of
our foreign controlled entities which have a functional currency
other than Australian dollars. The foreign currency gains or losses
arising from this risk are recorded through the foreign currency
translation reserve. We manage this translation foreign exchange
risk with forward foreign currency contracts, cross currency swaps
and/or borrowings denominated in the currency of the entity
concerned. We currently hedge our net investment in Hong Kong
CSL Limited in the range of 40 per cent to 50 per cent (2012: 40 per
cent to 50 per cent).
In addition, our controlled entities may hedge foreign exchange
transactions such as exposures from asset/liability balances or
forecast sales/purchases in currencies other than their functional
currency. Where this occurs, external foreign exchange contracts
are designated at the group level as hedges of foreign exchange
risk on the specific asset/liability balance or forecast transaction.
We also economically hedge a proportion of foreign currency risk
associated with trade and other creditor balances using forward
foreign currency contracts.
Refer to section (b) “Hedging strategies” and section (c) “Hedge
relationships” contained in this note for further information.
(iv) Sensitivity analysis - foreign currency risk
The sensitivity analysis included in this section is based on foreign
currency risk exposures on our financial instruments and net foreign
investment balances as at reporting date.
The translation of our investments in foreign operations from their
functional currency to Australian dollars represents a translation risk
rather than a financial risk. Nevertheless, in this sensitivity analysis
we have included the translation impact on our foreign currency
translation reserve from movements in the exchange rate. In doing
so, this sensitivity analysis reflects the impact on equity from a
movement in the exchange rate associated with both the underlying
hedged investment and the financial instruments hedging the
translation currency risk.
Adverse versus favourable movements are determined relative to
the underlying exposure. An adverse movement in exchange rates
implies an increase in our foreign currency risk exposure and a
worsening of our financial position. A favourable movement in
exchange rates implies a reduction in our foreign currency risk
exposure and an improvement of our financial position.
A sensitivity of 10 per cent has been selected as this is considered
reasonable taking into account the current level of exchange rates
and the volatility observed both on an historical basis and on market
expectations for future movements. For example, comparing the
Australian dollar exchange rate against the Euro, the year end rate
of 0.7096 (2012: 0.8089) would generate a 10 per cent favourable
position of 0.7806 (2012: 0.8898) and an adverse position of 0.6386
(2012: 0.7280). This range is considered reasonable given the
volatility that has been observed.
Foreign currency risk exposure from recognised assets and
liabilities arises primarily from our long term borrowings
denominated in foreign currencies. There is no significant impact
on profit or loss from foreign currency movements associated with
these borrowings as they are effectively hedged.
There is some volatility in profit or loss from exchange rate
movements associated with our borrowings de-designated or not in
hedge relationships and with our forecast transactions denominated
in a foreign currency.
We are exposed to equity impacts from foreign currency
movements associated with our offshore investments and our
derivatives in cash flow hedges of offshore borrowings. This foreign
currency risk is spread over a number of currencies and accordingly
we have disclosed the sensitivity analysis on a total portfolio basis
and not separately by currency. Our foreign currency exposure
associated with cash flow hedge derivatives is predominantly in
Euros and our offshore investments mainly in Hong Kong dollars,
British pounds sterling and Chinese renminbi (relating to our
investments in Hong Kong CSL Limited, Telstra Limited, Autohome
Inc. and Sequel Media Inc.).
18. FINANCIAL RISK MANAGEMENT (CONTINUED)