Unilever 2005 Annual Report Download - page 89

86 Unilever Annual Report and Accounts 2005
Notes to the consolidated accounts
Unilever Group
2 Financial risk management
Treasury risks
Unilever manages a variety of market risks, including the effects of
changes in foreign exchange rates, interest rates, liquidity and
counterparty risks.
Unilever has an interest rate management policy aimed at optimising
net interest cost and reducing volatility. This is achieved by modifying
the interest rate exposure of debt and cash positions through the
use of interest rate swaps. Further details on the fixing levels of the
projected cash and borrowing positions are given in note 19 on
page 110.
Fixed rate investments give rise to a fair value interest rate risk. The
floating amounts give rise to a cash flow interest rate risk.
Because of Unilever’s broad operational reach, it is subject to risks from
changes in foreign currency values that could affect earnings. As a
practical matter, it is not feasible to fully hedge these fluctuations.
Additionally, Unilever believes that most currencies of major countries
in which it operates will equalise against the euro over time. Unilever
does have a foreign exchange policy that requires operating
companies to manage trading and financial foreign exchange
exposures within prescribed limits. This is achieved primarily through
the use of forward foreign exchange contracts. Regional groups
monitor compliance with this policy. At the end of 2005, there was no
material exposure from companies holding assets and liabilities other
than in their functional currency.
In addition, as Unilever conducts business in many foreign currencies
but publishes its financial statements and measures its performance in
euros, it is subject to exchange risk due to the effects that exchange
rate movements have on the translation of the underlying net assets
of its foreign subsidiaries. Unilever aims to minimise its foreign
exchange exposure in operating companies by borrowing in the local
currency, except where inhibited by local regulations, lack of local
liquidity or local market conditions. For those countries that, in the
view of management, have a substantial retranslation risk, Unilever
may hedge such net investment. Nevertheless from time to time,
currency revaluations on unhedged investments will trigger exchange
translation movements in the balance sheet. In 2005, the significant
strengthening of the US dollar against the euro has had a positive
impact on reported operating results, but has had a negative impact
on debt and equity, when reported in euros.
Liquidity risk is managed by maintaining access to global debt markets
through an infrastructure of short-term and long-term debt
programmes. In addition to this, Unilever has committed credit
facilities in place to support its commercial paper programmes and for
general corporate purposes. See note 18 on page 109 for further
details of these credit facilities.
Counterparty exposures are minimised by restricting dealing
counterparties to a limited number of financial institutions that have
secure credit ratings, by working within agreed counterparty limits, by
obtaining collateral for outstanding positions and by setting limits on
the maturity of exposures. Counterparty credit ratings are closely
monitored and concentration of credit risk with any single
counterparty is avoided. There was no significant concentration of
credit risk with any single counterparty as at the year end.
Master netting agreements are in place for the majority of interest
rate derivative instruments. The risk in the event of default by a
counterparty is determined by the extent to which market prices have
moved since the contracts were made. The Group believes that the
risk of incurring such losses is remote.