Telstra 2007 Annual Report Download - page 250

Telstra Corporation Limited and controlled entities
247
Notes to the Financial Statements (continued)
(b) Risks and mitigation (continued)
Market risk (continued)
(i) Interest rate risk (continued)
Sensitivity analysis
Table I and Table J show the effect on profit and equit y after tax if
in t erest rat es at t hat dat e had been 10 per cent h igh er or l ow er w it h al l
other variables held constant, taking into account all underlying
exposures and related hedges. Concurrent movements in interest
rates and parallel shift s in the yield curves are assumed.
Also included in Table I and Table J is the effect on finance costs on our
floating rate instruments if int erest rat es had been 10 per cent higher
or lower during t he year.
A sensit ivity of 10 per cent has been selected as this is considered
reasonable given the current level of both short term and long term
Australian dollar interest rat es. A 10 per cent sensitivit y would move
short term interest rates at 30 June 2007 from around 6.25% to 6.875%
represent ing a 62.5 basis points shift. This would represent two to
three rate increases which is reasonably possible in the current
environment with the bias coming from the Reserve Bank of Australia
and confirmed by market expectations that interest rates in Australia
are more likely to move up than down in the coming period.
It should be noted that the results reflect the net impact on a hedged
basis which will be primarily reflecting the Australian dollar floating
or Australian dollar fixed position from the cross currency and interest
rate swap hedges and therefore it is the movement in the Australian
dollar interest rat es which is the important assumption in this
sensitivity analysis.
Based on the sensitivity analysis, if interest rates were 10% higher,
finance costs would be impacted by two factors, the impact on
interest expense being incurred on our net floating rate Australian
dollar positions during the year and the ineffectiveness result ing from
the change in fair value of both our derivat ives and borrowings which
are designated in a fair value hedge. These two factors partially offset
each other as the ineffective component result s in a gain and the
increase in finance costs results in an increase in expense.
34. Financial and capital risk management (continued)
Table I Telstra Group
Finance costs Net profit
Equity (Cash flow
hedging reserve)
Year ended 30 June As at 30 June As at 30 June
2007 2006 2007 2006 2007 2006
$m $m $m $m $m $m
If interest rates were 10 per cent higher with all ot her
variables held constant - increase/(decrease) . . . 20 8(20) (8) 71 29
If interest rates were 10 per cent lower with all ot her
variables held constant - increase/(decrease) . . . (20) (8) 20 8(76) (29)
Table J Telstra Entity
Finance costs Net profit
Equity (Cash flow
hedging reserve)
Year ended 30 June As at 30 June As at 30 June
2007 2006 2007 2006 2007 2006
$m $m $m $m $m $m
If interest rates were 10 per cent higher with all ot her
variables held constant - increase/(decrease) . . . 20 8(20) (8) 71 29
If interest rates were 10 per cent lower with all ot her
variables held constant - increase/(decrease) . . . (20) (8) 20 8(76) (29)