Singapore Airlines 2016 Annual Report Download - page 203

38 Financial Risk Management Objectives and Policies (in $ million) (continued)
(b) Foreign currency risk
The Group is exposed to the eects of foreign exchange rate fluctuations because of its foreign currency denominated operating revenues
and expenses. For the financial year ended 31 March 2016, these accounted for 48.6% of total revenue (FY2014/15: 52.1%) and 58.0% of
total operating expenses (FY2014/15: 65.8%). The Group’s largest exposures are from United States Dollar, Euro, UK Sterling Pound, Swiss
Franc, Australian Dollar, New Zealand Dollar, Japanese Yen, Indian Rupee, Hong Kong Dollar, Chinese Yuan, Korean Won and Malaysian
Ringgit. The Group generates a surplus in all of these currencies, with the exception of USD. The deficit in USD is attributable to capital
expenditure, fuel costs and aircra leasing costs – all conventionally denominated and payable in USD.
The Group manages its foreign exchange exposure by a policy of matching, as far as possible, receipts and payments in each individual
currency. Surpluses of convertible currencies are sold, as soon as practicable, for USD or SGD. The Group also uses foreign currency forward
and option contracts to hedge a portion of its future foreign exchange exposure. Such contracts provide for the Group to sell currencies
at predetermined forward rates, buying either USD or SGD depending on forecast requirements, with settlement dates that range from
one month up to one year. The Company also uses cross currency swap contracts to hedge a portion of its fixed future foreign exchange
exposure in USD. The cross currency swap contracts provide for the Company to exchange surplus currency, specifically JPY, into USD
predetermined costs. The Group uses these currency hedging contracts purely as a hedging tool. It does not take positions in currencies
with a view to making speculative gains from currency movements.
Cash flow hedges
As at 31 March 2016, the Company holds USD512.6 million (2015: USD310.3 million) in short-term deposits to hedge against foreign
currency risk for a portion of the forecast USD capital expenditure in the next 12 months. A fair value loss of $22.5 million (2015: gain of
$22.3 million) is included in the fair value reserve in respect of these contracts. During the financial year, the Company also entered into
new foreign currency forward contracts to hedge against foreign currency risk for a portion of the forecast USD capital expenditure in the
next 13 to 24 months. As at 31 March 2016, a fair value loss of $50.3 million is included in the fair value reserve in respect of these contracts.
During the financial year, the Company entered into cross currency swap contracts to hedge expected future lease commitments in USD
and foreign currency risk of expected future JPY surplus until August 2021. The cash flow hedges are to be assessed quarterly prospectively
and retrospectively for hedge eectiveness. As at 31 March 2016, the hedge is assessed to be eective and a net fair value gain of $2.0
million is included in the fair value reserve with respect to these contracts.
Fair value through profit or loss
In addition, the Group has cross currency swap contracts in place with notional amounts of $45.9 million (2015: $3.7 million to
$34.5 million) where it pays SGD and receives USD at USD/SGD exchange rate of 1.3085 (FY2014/15: 1.3085 to 1.6990). These contracts
are used to protect the foreign exchange risk exposure of the Group’s USD-denominated finance lease commitments. The swap will
mature on 14 February 2018.
Foreign currency sensitivity analysis
The foreign currency risk sensitivity analysis is based on the assumption that all cash flow hedges are highly eective; hence there will be
no impact on profit before taxation from the cash flow hedges.
The following table details the sensitivity of a 1% strengthening of SGD against the respective foreign currencies. The sensitivity analysis
includes only outstanding foreign currency hedging contracts and significant outstanding foreign currency denominated monetary items
and adjusts their translation at the period end for a 1% change in foreign currency rates.
Annual Report FY2015/16 201