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70 Carphone Warehouse Group plc Annual Report 2011
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
18 FINANCIAL RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
The book value and fair value of the Group’s financial assets, liabilities and derivative financial instruments, excluding the Group’s
loans and other borrowings, is as follows:
2011
£m
2010
£m
Cash and cash equivalents 120.6 100.0
Loans to Virgin Mobile France (see note 14) 35.7 50.8
Trade and other receivables 6.5 5.6
Trade and other payables (16.2) (10.1)
Fair values have been arrived at by discounting future cash flows, assuming no early redemption, or by revaluing forward currency
contracts to year-end market rates or rates as appropriate to the instrument.
Financial risk management policies
The Group’s activities expose it to certain financial risks including market risk (such as foreign exchange risk and interest rate risk),
credit risk and liquidity risk. The Group Treasury function, which operates under approved treasury policies, uses certain financial
instruments to mitigate potential adverse effects on the Group’s financial performance from these risks. These financial
instruments may consist of bank loans and deposits, spot and forward foreign exchange contracts, and foreign exchange swaps.
Other products, such as interest rate swaps and currency options, may also be used depending on the risks to be covered. The
Group does not trade or speculate in any financial instruments.
Foreign exchange risk
Translational risk and net investment hedges
The Group uses forward currency contracts to hedge balance sheet assets and liabilities and also for short-term liquidity
management. Translational currency risk, primarily arising on funding of Virgin Mobile France, is hedged using foreign exchange
swaps. In May 2010 the Group discontinued net investment hedging in order to avoid exposure to potential cash volatility on the
associated hedges.
The Group’s foreign exchange position is calculated daily and any positions are closed out unless the exposure is immaterial.
The translation risk on converting overseas currency profits or losses is not hedged and such profits or losses are converted into
UK Sterling at average exchange rates throughout the year. This gives the Group a direct exposure to the Euro in respect of Virgin
Mobile France. As noted above, while Best Buy Europe reports in UK Sterling, its results are materially affected by the Euro and
US Dollar. Best Buy Europe hedges a proportion of its non-Sterling earnings to provide certainty of their value.
At 31 March 2011, the total notional principal amount of outstanding currency contracts was £35.8m (2010: £109.5m), none of which
(2010: £60.3m) was held in relation to net investment hedges.
Currency loans and foreign exchange contracts are sensitive to movements in foreign exchange rates. This sensitivity can be
analysed in comparison to year-end rates (assuming all other variables remain constant) where a 10% movement in the UK
Sterling / Euro exchange rate would have no impact on the income statement or equity (2010: £6.0m movement in equity).
Changes in the value of currency loans and foreign exchange contracts would not be expected to have an impact on the income
statement, as they match currency assets, the value of which would rise or fall correspondingly with the hedging instrument,
assuming the hedges remain fully effective. The impact on equity of revaluations would have been offset when the Group undertook
net investment hedging by the revaluation of foreign currency net assets of joint venture investments that are hedged by these
borrowings and derivatives.
Best Buy Europe’s policies for translational risk are consistent with those of the Group and it ceased net investment hedging
in the year ended 3 April 2010. Virgin Mobile France has limited translational risk exposures as its operations are based solely
in France.
Transactional risk and cash flow hedges
The Group is exposed to limited cross-border transactional commitments but where significant, these are hedged at inception using
forward currency contracts. At 31 March 2011 and 31 March 2010 the Group held no material cash flow hedges.
Best Buy Europe’s operations are exposed to foreign currency transactional risks, primarily through the Best Buy Mobile profit
share arrangement and purchases of stock. Best Buy Europe uses foreign exchange contracts to mitigate against foreign currency
fluctuations arising on these transactions.