Unilever 2003 Annual Report Download - page 49

46 Unilever Annual Report & Accounts and Form 20-F 2003
Risk management
Treasury risks:
Unilever Treasury manages a variety of market risks, including the
effects of changes in foreign exchange rates, interest rates and
credit spreads. Other risks managed include liquidity, country and
counterparty risks.
Unilever has an interest rate management policy aimed at
optimising net interest cost and reducing volatility. This is
achieved by modifying the interest rate exposure of debt and cash
positions through the use of interest rate swaps. Further details
on the fixing levels of the projected net debt are given in note 15
on page 97.
Unilever’s foreign exchange policy requires that operating
companies hedge trading and financial foreign exchange
exposures. This is achieved primarily through the use of forward
foreign exchange contracts. Some flexibility is permitted within
overall exposure limits. Business groups monitor compliance with
this policy. At the end of 2003, there was no material exposure
from companies holding assets and liabilities other than in their
functional currency.
Unilever conducts business in many foreign currencies but
publishes its financial statements and measures its performance in
euros. As a result, it is subject to exchange risk due to the effects
that exchange rate movements have on the translation of the
results and underlying net assets of its foreign subsidiaries.
Unilever aims to reduce its foreign exchange exposure in
operating companies by borrowing in the local currency, except
where inhibited by local regulations, lack of local liquidity or local
market conditions. An exception may also be made where the
economic value of the net assets locally is considered substantially
to exceed their book value. From time to time, currency
revaluations will trigger exchange translation movements in our
balance sheet as a result of these exceptions. In 2003, the
significant weakening of the US dollar against the euro has had
a negative impact on our results, but has had a positive impact
on our debt and equity, when reported in euros.
Counterparty exposures are minimised by restricting dealing
counterparties to a limited number of financial institutions that
have secure credit ratings, by working within agreed counterparty
limits, by obtaining collateral for outstanding positions and by
setting limits on the maturity of exposures. Counterparty credit
ratings are closely monitored and concentration of credit risk
with any single counterparty is avoided. There was no significant
concentration of credit risks with any single counterparty as at
the year end.
As a result of the share option plans for employees, we are
exposed to movements in our own share price. In recent years
we have hedged this risk through buying Unilever shares in the
market when the share option is granted and holding these
shares until the share option is exercised or lapses. In 2001, we
also entered into a contract with a bank for the forward purchase
of Unilever shares, further details of which are given in note 15
on page 98. At the year end, 93% of all outstanding employee
share options were hedged; based on Unilever’s experience with
the exercise level of options we consider this position as being
fully hedged.
The analysis below presents the sensitivity of the fair value
of the financial and derivative instruments the Group held at
31 December 2003, to the hypothetical changes described below.
Interest rate sensitivity:
The fair values of debt, investments and related hedging
instruments are affected by movements in interest rates. The
analysis shows 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 2003.
Foreign exchange rate sensitivity:
The values 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 values
to a hypothetical 10% change in foreign exchange rates as at
31 December 2003.
Fair value changes:
Sensitivity to a
hypothetical 10% change in
rates as at 31 December
€ million € million
2003 2002
Interest rate risk 175 218
Foreign exchange rate risk 51
The above-mentioned interest rate sensitivity relates to financial
and derivative instruments with fair values amounting to
€16 411 million at the end of 2003 (2002: €20 854 million).
For further information on fair values see note 15 on page 98.
The above-mentioned foreign exchange rate risk relates to a value
of financial instruments and derivatives of €46 million at the end
of 2003 (2002: €10 million).
Further details on derivatives, foreign exchange exposures and
other related information on financial instruments are given in
note 15 on pages 97 and 98.
In addition, as a multinational group, Unilever’s businesses are
exposed to varying degrees of risk and uncertainty related to
other factors including competitive pricing, consumption levels,
physical risks, legislative, fiscal, tax and regulatory developments,
terrorism and economic, political and social conditions in the
environments where we operate. All of these risks could
materially affect the Group’s business, our turnover, operating
profit, net profit, net assets and liquidity. There may also be risks
which are unknown to Unilever or which are currently believed
to be immaterial.