BT 2011 Annual Report Download - page 145

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142
FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29. Financial instruments and risk management continued
Hedging strategy
A significant proportion of the group’s current revenue is invoiced in Sterling, and a significant element of its operations and costs arise
within the UK. The group’s overseas operations generally trade and are funded in their functional currency which limits their exposure to
foreign exchange volatility. The group’s foreign currency borrowing comprised:
2011 2010
At 31 March £m £m
Euro 3,361 4,294
US Dollar 2,966 5,065
Other 17 7
6,344 9,366
These borrowings are used to finance the group’s operations and have been predominantly swapped into Sterling using cross currency
swaps. The currency profile of these borrowings after the impact of hedging is disclosed in note 20.
The group also enters into forward currency contracts to hedge foreign currency investments, interest expense, capital purchases and
purchase and sale commitments on a selective basis. The commitments hedged are principally denominated in US Dollar, Euro and Asia
Pacific region currencies. As a result, the group’s exposure to foreign currency arises mainly on its non UK subsidiary investments and on
residual currency trading flows.
Sensitivities
After hedging, with all other factors remaining constant and based on the composition of assets and liabilities at the balance sheet date, the
group’s exposure to foreign exchange volatility in the income statement from a 10% strengthening/weakening in Sterling against other
currencies would result in a credit/charge respectively of approximately £5m (2010: approximately £26m).
The group’s main exposure to foreign exchange volatility within shareholders’ equity (excluding translation exposures) arises from fair value
movements on derivatives held in the cash flow reserve. The majority of foreign exchange fluctuations in the cash flow reserve are recycled
immediately to the income statement to match the hedged item and therefore the group’s exposure to foreign exchange fluctuations in
equity were insignificant in both 2011 and 2010.
Outstanding cross currency swaps at 31 March 2011 are detailed in the Hedging activities and Other derivatives sections below.
Credit risk management
Treasury management policy
The group’s exposure to credit risk arises from financial assets transacted by the treasury operation (primarily derivatives, investments, cash
and cash equivalents) and from its trading related receivables. For treasury related balances, the Board’s defined policy restricts exposure to
any one counterparty by setting credit limits based on the credit quality as defined by Moody’s and S&P and by defining the types of
financial instruments which may be transacted. The minimum credit ratings permitted with counterparties are A3/A– for long-term and
P1/A1 for short-term investments.
The treasury operation continuously reviews the limits applied to counterparties and will adjust the limit according to the nature and credit
standing of the counterparty up to the maximum allowable limit set by the Board. Where multiple transactions are undertaken with a single
counterparty, or group of related counterparties, the group may enter into netting arrangements to reduce the group’s exposure to credit
risk by making use of standard International Swaps and Derivative Association (ISDA) documentation. The group also seeks collateral or other
security where it is considered necessary. The treasury operation regularly reviews the credit limits applied when investing with
counterparties in response to market conditions and continues to monitor their credit quality and actively manages any exposures which
arise.
Exposures
The maximum credit risk exposure of the group’s financial assets at the balance sheet date is as follows:
2011 2010
At 31 March Notes £m £m
Derivative financial assets 21 733 1,700
Investments 15 80 470
Trade and other receivablesa19 2,558 2,947
Cash and cash equivalents 16 351 1,452
3,722 6,569
aThe carrying amount excludes £286m (2010: £336m) of non-current trade and other receivables which relate to non financial assets, and £774m (2010: £749m) of prepayments and other receivables.
OVERVIEWBUSINESS REVIEWFINANCIAL REVIEWREPORT OF THE DIRECTORSFINANCIAL STATEMENTSADDITIONAL INFORMATION