Unilever 2015 Annual Report Download - page 130

POTENTIAL IMPAT OF RISK MANAEMENT POLIY AND
HEDIN STRATEY
SENSITIVITY TO THE RISK
urrency rsk on the roup’s net
nvestments
The roup s also subect to exchange rsk
n relaton to the translaton of the net
nvestments of ts foregn operatons nto
euros for ncluson n ts consoldated
fnancal statements
These net nvestments nclude roup
fnancal loans whch are monetary tems
that form part of our net nvestment n
foregn operatons, of 82 bllon (2014
70 bllon), of whch 41 bllon (2014
40 bllon) s denomnated n BP In
accordance wth IAS 21, the exchange
dfferences on these fnancal loans are
booked through reserves
Part of the currency exposure on the
roup’s nvestments s also managed usng
US$ net nvestment hedges wth a nomnal
value of 39 bllon (2014 mostly US$
hedges 27 bllon)
At 31 December 2015, the net exposure of
the net nvestments n foregn currences
amounts to 113 bllon (2014 104 bllon)
Unlever ams to mnmse ths foregn
nvestment exchange exposure by
borrowng n local currency n the operatng
companes themselves In some locatons,
however, the roup’s ablty to do ths s
nhbted by local regulatons, lack of local
lqudty or by local market condtons
Where the resdual rsk from these
countres exceeds prescrbed lmts,
Treasury may decde on a case-by-case
bass to actvely hedge the exposure Ths s
done ether through addtonal borrowngs
n the related currency, or through the use
of forward foregn exchange contracts
Where local currency borrowngs, or
forward contracts, are used to hedge the
currency rsk n relaton to the roup’s net
nvestment n foregn subsdares, these
relatonshps are desgnated as net
nvestment hedges for accountng purposes
Impact on equty – trade related cash flow
hedges reserves
A 10% strengthenng of the euro aganst
other currences would have led to a
22 mllon loss (of whch 40 mllon loss
would relate to strengthenng aganst
sterlng) on hedges used to cover future
trade cash flows to whch cash flow hedge
accountng s appled A 10% weakenng of the
euro aganst other currences would have led
to a 24 mllon gan (out of whch 44 mllon
gan would relate to strengthenng aganst
sterlng) on hedges used to cover future
trade cash flows to whch cash flow hedge
accountng s appled
Impact on equty – net nvestment hedges
A 10% strengthenng of the euro aganst other
currences would have led to a 352 mllon
(2014 283 mllon) loss on the net nvestment
hedges used to manage the currency
exposure on the roup’s nvestments
A 10% weakenng of the euro aganst other
currences would have led to a 430 mllon
(2014 311 mllon) gan on the net nvestment
hedges used to manage the currency
exposure on the roup’s nvestments
Impact on equty – net nvestments n
group companes
A 10% strengthenng of the euro aganst
all other currences would have led to a
675 mllon negatve retranslaton effect
(2014 697 mllon negatve retranslaton
effect) A 10% weakenng of the euro aganst
those currences would have led to a
825 mllon postve retranslaton effect
(2014 852 mllon postve retranslaton
effect) In lne wth accepted hedge
accountng treatment and our accountng
polcy for fnancal loans, the retranslaton
dfferences would be recognsed n equty
(III) INTEREST RATE RISK(a)
The roup s exposed to market nterest rate
fluctuatons on ts floatng rate debt Increases
n benchmark nterest rates could ncrease
the nterest cost of our floatng-rate debt and
ncrease the cost of future borrowngs The
roup’s ablty to manage nterest costs also
has an mpact on reported results
Takng nto account the mpact of nterest
rate swaps, at 31 December 2015, nterest
rates were fxed on approxmately 70% of
the expected net debt for 2016, and 61%
for 2017 (70% for 2015 and 67% for 2016
at 31December 2014)
For nterest management purposes,
transactons wth a maturty shorter than
sx months from ncepton date are not
ncluded as fxed nterest transactons
The average nterest rate on short-term
borrowngs n 2015 was 09% (2014 12%)
Unlever’s nterest rate management
approach ams for an optmal balance
between fxed and floatng-rate nterest
rate exposures on expected net debt The
obectve of ths approach s to mnmse
annual nterest costs after tax and to
reduce volatlty
Ths s acheved ether by ssung fxed or
floatng-rate long-term debt, or by
modfyng nterest rate exposure through
the use of nterest rate swaps
Furthermore, Unlever has nterest rate
swaps for whch cash flow hedge
accountng s appled
Assumng that all other varables reman
constant, a 10 percentage pont ncrease
n floatng nterest rates on a full-year bass
as at 31 December 2015 would have led to
an addtonal 21 mllon of fnance costs
(2014 26 mllon addtonal fnance costs)
A 10 percentage pont decrease n floatng
nterest rates on a full-year bass would
have an equal but opposte effect
Assumng that all other varables reman
constant, a 10 percentage pont ncrease n
floatng nterest rates on a full-year bass as
at 31 December 2015 would have led to an
addtonal 1 mllon credt n equty from
dervatves n cash flow hedge relatonshps
(2014 39 mllon credt) A 10 percentage
pont decrease n floatng nterest rates
on a full-year bass would have led to an
addtonal 1 mllon debt n equty from
dervatves n cash flow hedge relatonshps
(2014 42 mllon debt)
(a) See the splt n fxed and floatng-rate nterest n the followng table
123Unilever Annual Report and Accounts 2015 Financial statements
16B. MANAGEMENT OF MARKET RISK ONTINUED