(a) Market risk
(i) Foreign exchange risk
Foreign exchange risk arises from future commercial
transactions and recognised assets and liabilities
denominated in a currency that is not the entity’s
functional currency. The risk is measured using
sensitivity analysis and cash flow forecasting.
Forward contracts, transacted with the finance
division, are used to manage foreign exchange
risk. The finance division is responsible for
managing exposures in each foreign currency by
using external forward currency contracts.
30 June 2012
30 June 2011
USD
USD
$’000
$’000
Forward exchange contracts
‑ buy foreign currency (cash flow hedges)
142
(11)
(ii) Cash flow and fair value interest rate risk
The Group’s main interest rate risk arises from
long‑term bonds. Bonds issued at variable rates
expose the Group to cash flow interest rate
risk. Borrowings issued at fixed rates expose
the Group to fair value interest rate risk if the
borrowings are carried at fair value. The Group
policy is to maintain a minimum of 25% of its
borrowings at fixed rate (currently that is at
100%) using interest rate swaps to achieve this
when necessary. During the financial year, the
Group’s borrowings at fixed and variable rate
were denominated in Australian Dollars.
Based on the various scenarios, the Group
manages its cash flow interest rate risk in
accordance with Treasury Policy by using
floating‑to‑fixed interest rate swaps. Such
interest rate swaps have the economic effect
of converting borrowings from floating rates
to fixed rates. Generally, the Group raises
long‑term borrowings at floating rates and
swaps them into fixed rates. Under the interest
rate swaps, the Group agrees with other
parties to exchange, at specified intervals
(mainly quarterly), the difference between
fixed contract rates and floating rate interest
amounts calculated by reference to the agreed
notional principal amounts.
In December 2011 at the issuing of the second
bond tranche of $300m the Group entered
into a floating‑to‑fixed interest rate swap for
the $300m. The Group also has exposure to
interest rate risk arising from investments in cash
equivalents and held to maturity investments
with variable interest rates.
The Group’s policy is to invest its available cash
reserves with due regard to the timing and
magnitude of cash flow requirements. The finance
division manages liquidity on a dynamic basis
within the framework of the Group’s Treasury
Policy where, typically, cash reserves are invested
in held to maturity investments, managed fund
investments, term deposits and short term
commercial papers with terms varying from
30 to 90 days. As at the reporting date, cash
reserves are being held as cash and short term
investments and held to maturity investments.
Note 02
Financial risk management (continued)
71
