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33. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
At 31 March 2006, the group had outstanding cross currency swap agreements in cash flow and fair value hedges against
borrowings with a total notional principal amount of £4.8 billion. The fair value of these cross currency swaps at the balance sheet
date comprised £32 million assets and £433 million liabilities. The cross currency swaps have a remaining term ranging from one
to 25 years to match the underlying hedged borrowings consisting of annual and semi-annual interest payments. The interest
receivable under these swap contracts are at a weighted average rate of 8.0% and interest payable are at a weighted average rate
of 8.5%.
Forward currency contracts have been designated as cash flow hedges of currency cash flows associated with certain euro and
US dollar step up interest payments on bonds. At 31 March 2006, the group had outstanding forward currency contracts with a
total notional principal amount of £77 million. The fair value of the forward currency contracts at the balance sheet date comprised
an asset of £1 million and had a remaining term of between three and 11 months after which they will be rolled into new contracts.
The hedged interest cash flows arise on a semi-annual basis and extend over a period of up to 12 years.
Spot movements on forward currency contracts have been designated as cash flow hedges of currency cash flows associated
with certain euro and US dollar commercial paper issues. At 31 March 2006, the group had outstanding forward currency contracts
with a total notional principal amount of £434 million. The fair value of the forward currency contracts at the balance sheet date
comprised assets of £6 million and had a remaining term of between one and two months to match the cash flows on maturity of
the underlying commercial paper.
Spot movements on forward currency contracts have been designated as cash flow hedges against spot movements on currency
cash flows associated with the forecast purchase of fixed assets and invoice cash flows arising on certain dollar denominated
supplies. At 31 March 2006, the group had outstanding forward currency contracts with a total notional principal amount of
£6 million assets and £197 million liabilities and a remaining term of less than one month after which they will be rolled into new
contracts. The forecast cash flows are anticipated to arise over a period of one month to six years from the balance sheet date.
The group has hedged spot movements on currency cash flows associated with US dollar denominated investments using
forward currency contracts. At 31 March 2006, the group had outstanding forward currency contracts with a total notional
principal amount of £759 million. The fair value of the forward foreign currency contracts at the balance sheet date comprised
liabilities of £5 million and had a remaining term of less than one month.
Other derivatives
At 31 March 2006, the group recognised the fair value of an option contained in a supplier contract which required separate
recognition. The option allows the supplier to acquire a certain share in one of the group’s investments based on the volume of
trade. In addition, two embedded derivatives expired during the year. The first related to an option exercisable on the group’sUS
dollar convertible bond (see note 5) and the second related to a put option whose value was based on an underlying interest
differential between sterling fixed and floating interest rates.
At 31 March 2006, the group held certain foreign currency forward and interest rate swap contracts that were not in hedging
relationships in accordance with IAS 39. Foreign currency forward contracts were economically hedging operational purchases and
sales and had a notional principal amount of £16 million assets and £101 million liabilities as at 31 March 2006 and a maturity
period of under 12 months. Interest rate swaps not in hedging relationships under IAS 39 had a notional principal amount of
£1.9 billion at 31 March 2006 and mature between 2014 and 2030. The interest receivable under these swap contracts are at a
weighted average rate of 6.1% and interest payable are at a weighted average rate of 7.7%. The volatility arising from these swaps
is recognised through the income statement but is limited due to a natural offset in their valuation movements.
Fair value of financial instruments
The following table discloses the carrying amounts and fair values of all of the group’s financial instruments which are not carried
at an amount which approximates to its fair value on the balance sheet at 31 March 2006 and 2005. The carrying amounts are
included in the group balance sheet under the indicated headings. The fair value of the financial instruments are the amounts at
which the instruments could be exchanged in a current transaction between willing parties, other than in a forced liquidation or
sale. In particular, the fair values of listed investments were estimated based on quoted market prices for those investments. The
carrying amount of the short-term deposits and investments approximated to their fair values due to the short maturity of the
investments held. The carrying amount of trade receivables and payables approximated to their fair values due to the short
maturity of the amounts receivable and payable. The fair value of the group’s bonds, debentures, notes, finance leases and other
long-term borrowings has been estimated on the basis of quoted market prices for the same or similar issues with the same
maturities where they existed, and on calculations of the present value of future cash flows using the appropriate discount rates in
effect at the balance sheet dates, where market prices of similar issues did not exist. The fair value of the group’s outstanding
swaps and foreign exchange contracts where the estimated amounts, calculated using discounted cash flow models, that the group
would receive or pay in order to terminate such contracts in an arms length transaction taking into account market rates of interest
and foreign exchange of the balance sheet date.
Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 107