Unilever 2000 Annual Report Download - page 30

Unilever Annual Report & Accounts and Form 20-F 2000
28
Report of the Directors
Financial review
Treasury and hedging policies
Unilever’s Treasury objective is to maintain Unilever’s financial
strength and flexibility within the context of the long-term
financial strategy set out in the ‘Finance and liquidity’
section above.
Unilever's Treasury operates as a cost centre and is governed
by policies and plans agreed by the directors. In addition
to policies, guidelines and exposure limits, a system of
authorities and extensive independent reporting covers all
major areas of activity. Performance is monitored closely.
Independent reviews are undertaken by the corporate
internal audit function.
Unilever has an interest rate management policy aimed
at optimising net interest cost and reducing volatility.
This is achieved by modifying the underlying interest rate
exposure of debt and cash positions through the use of
straightforward derivative instruments. The proportion of
fixing was increased significantly follow ing the increase in
debt resulting from the various acquisitions in 2000.
Under the Group’s foreign exchange policy, trading and
financial transaction exposures are generally hedged, mainly
through the use of forw ard foreign exchange contracts.
Some flexibility is permitted w ithin overall exposure limits.
Assets held in foreign currencies are, to a considerable
extent, financed by borrowings in the same currencies.
Managing market risks
The Group is exposed to a variety of market risks, including
the effects of changes in foreign currency exchange rates,
interest rates and credit spreads. In the normal course
of business, the Group also faces risks that are either
non-financial or non-quantifiable, for example country
and counterparty risks.
Counterparty exposures are minimised by restricting dealing
counterparties to a limited number of financial institutions
that have secure credit ratings, by working w ithin agreed
counterparty limits and by setting limits on the maturity
of investments. Counterparty credit ratings are closely
monitored and concentration of credit risk with any
single counterparty is avoided.
The Group uses straightforward derivative financial
instruments, for example interest rate swaps, forward rate
agreements and forward exchange contracts, to manage the
market risks associated with the underlying assets, liabilities
and anticipated transactions. The Group uses these
derivative financial instruments to reduce risk by creating
offsetting market exposures. The use of leveraged
instruments is not permitted.
The following discussion about our risk management
activities includes ‘forward-looking’ statements that involve
risk and uncertainties. Our actual results could differ
materially from those projected. See the ‘Cautionary
Statement’ at the front of this document.
The analysis below presents the sensitivity of the fair value
of the financial and derivative instruments the Group held
at 31 December 2000, to the hypothetical changes
described below.
Interest rate risk
The fair value of debt, investments and related hedging
instruments is affected by movements in interest rates.
The analysis show s the sensitivity of the fair value of
interest rate sensitive instruments to a hypothetical 10%
change in the interest rates across all maturities as at
31 December 2000.
Foreign exchange rate risk
The fair value of debt, investments and hedging
instruments, denominated in currencies other than the
functional currency of the entities holding them, are
subject to exchange rate movements. The analysis shows
the sensitivity of these fair values to a hypothetical 10%
change in foreign exchange rates as at 31 December 2000.
Fair value changes Sensitivity to a hypothetical
10% adverse movement in
rates as at 31 December
(million)
2000 1999
Interest rate risk 338 4
Foreign exchange rate risk 1 16
Further details on derivatives, foreign exchange exposures
and other related information on financial instruments are
given in note 30 on page 74.
Supply risk and commodities contracts
Unilever’s products are manufactured from a number
of raw materials. While materials are expected to be in
adequate supply, any shortages or disruptions in supply
would have a material adverse effect on gross margin.
Some of our businesses, principally edible fats companies
in Europe, may use forw ard contracts in a number of oils
to hedge future requirements. We purchase forw ard
contracts in bean, rape, sunflow er, palm, coconut and
palm kernel oils, almost always for physical delivery.
We may also use futures contracts to hedge future price
movements; however, the amounts are not material.
The total value of open futures contracts at the end
of 2000 was not material.
In addition, our plantations businesses may use forward
contracts for physical delivery of palm oil and tea under
strictly controlled policies and exposure limits. We did
not have any outstanding futures contracts at the end
of 2000.
Distribution
Unilever’s products are generally sold through its sales force
and through independent brokers, agents and distributors to
chain, w holesale, co-operative and independent grocery