Qantas 2011 Annual Report Download - page 102

THE QANTAS GROUP 100
for the year ended 30 June 2011
Notes to the Financial Statements continued
B MARKET RISK
The Qantas Group has exposure to market risk in the following areas: interest rate, foreign exchange and fuel price. The following section
summarises the Qantas Group’s approach to managing these risks.
(i) Interest Rate Risk
Interest rate risk refers to the risk that the fair value or future cash ows of a nancial instrument will uctuate because of changes in market
interest rates. The Qantas Group has exposure to movements in interest rates arising from its portfolio of interest rate sensitive assets and
liabilities in a number of currencies, predominantly in AUD, GBP, USD, JPY, NZD and EUR. These principally include corporate debt, leases and
cash. The Qantas Group manages interest rate risk by reference to pricing intervals spread across different time periods with the proportion of
oating and xed rate debt managed separately. The relative mix of xed and oating interest rate funding is managed by using interest rate
swaps, forward rate agreements and options.
For the year ended  June  interest-bearing liabilities amounted to $, million (: $, million). The xed/oating split is  per cent
and  per cent respectively (:  per cent and  per cent). Other nancial assets and liabilities include nancial instruments related to
debt totalling $ million (liability) (: $ million (liability)). These nancial instruments are recognised at fair value in accordance with
AASB .
The change in carrying value of nancial instruments relating to debt includes impairment losses for the year of $nil (: $ million).
(ii) Foreign Exchange Risk
Foreign exchange risk is the risk that the fair value of future cash ows of a nancial instrument will uctuate because of changes in foreign
exchange rates. The source and nature of this risk arise from operations, capital expenditures and translation risks.
Cross-currency swaps are used to convert long-term foreign currency borrowings to currencies in which the Qantas Group has forecast
sufcient surplus net revenue to meet the principal and interest obligations under the swaps. Where long-term borrowings are held in foreign
currencies in which the Qantas Group derives surplus net revenue, offsetting forward foreign exchange contracts have been used to match
the timing of cash ows arising under the borrowings with the expected revenue surpluses. These foreign currency borrowings have a maturity
of between one and  years. To the extent a foreign exchange gain or loss is incurred, and the cash ow hedge is deemed effective, this is
deferred until the net revenue is realised.
Forward foreign exchange contracts and currency options are used to hedge a portion of remaining net foreign currency revenue or
expenditure in accordance with Qantas Group policy. Net foreign currency revenue and expenditure out to two years may be hedged within
specic parameters, with any hedging outside these parameters requiring approval by the Board. Purchases and disposals of property, plant
and equipment denominated in a foreign currency may be hedged out to two years using a combination of forward foreign exchange
contracts and currency options.
As at  June ,  per cent (:  per cent) of forecast operational and capital expenditure foreign exchange exposures less than one
year and  per cent (:  per cent) of exposures greater than one year but less than three years have been hedged. As at  June ,
total unrealised exchange gains on hedges of net revenue designated to service long-term debt were $ million (: $ million).
For the year ended  June , other nancial assets and liabilities include derivative nancial instruments used to hedge foreign currency,
including hedging of future capital and operating expenditure payments, totalling $ million (net liability) (: $ million (net asset)).
These are recognised at fair value in accordance with AASB .
(iii) Fuel Price Risk
The Qantas Group uses options and swaps on jet kerosene, gasoil and crude oil to hedge exposure to movements in the price of aviation fuel.
Hedging is conducted in accordance with Qantas Group policy. Up to  per cent of estimated fuel consumption out to  months and up to 
per cent in the subsequent  months may be hedged, with any hedging outside these parameters requiring approval by the Board. As at 
June ,  per cent (:  per cent) of forecast fuel exposure less than one year and  per cent (:  per cent) of forecast fuel
exposures greater than one year but less than three years have been hedged. For the year ended  June , other nancial assets and
liabilities include fuel derivatives totalling $ million (asset) (: $ million (asset)). These are recognised at fair value in accordance with
AASB .
(iv) Sensitivity on Interest Rate, Foreign Exchange and Fuel Price Risk
The table on the following page summarises the gain/(loss) impact of reasonably possible changes in market risk, relating to existing nancial
instruments, on net prot and equity before tax. For the purpose of this disclosure, the following assumptions were used:
—  basis points increase and decrease in all relevant interest rates
—  per cent (:  per cent) USD depreciation and USD appreciation
—  per cent (:  per cent) increase and decrease in all relevant fuel indices
— Sensitivity analysis assumes hedge designations and effectiveness testing results as at  June  remain unchanged
— Sensitivity analysis is isolated for each risk. For example, fuel price sensitivity analysis assumes all other variables, including foreign
exchange rates, remain constant
— Sensitivity analysis on foreign currency pairs and fuel indices of  per cent represent recent volatile market conditions
34. Financial Risk Management continued