Carphone Warehouse 2012 Annual Report Download - page 79

Carphone Warehouse Group plc Annual Report 2012 75
17 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:
2012 2011
£m £m
Cash and cash equivalents 102.7 120.6
Loans to Virgin Mobile France (see note 13) 24.3 35.7
Trade and other receivables 21.3 6.5
Trade and other payables (10.1) (16.2)
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's treasury function, which operates under approved treasury policies, uses certain financial instruments
to mitigate potentially 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. 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 explained
innote16, while Best Buy Europe reports in UK Sterling, its results were materially affected by the Euro and US Dollar. Best Buy Europe
may hedge aproportion of its non‑Sterling earnings to provide certainty of their value.
At 31 March 2012, the total notional principal amount of outstanding currency contracts was £24.3m (2011: £35.8m).
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 (2011: no impact). Changes in the value of currency loans would not be
expected to have an impact on the income statement, as they are matched by the value of foreign exchange contracts, assuming the
hedges remain fully effective.
Best Buy Europe’s policies for translational risk are consistent with those of the Group. 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 2012 and 31 March 2011 the Group held no material cash flow hedges.
Best Buy Europe’s operations were 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.
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