Full Annual Report 2006 - Singapore Technologies Engineering

193
Notes to the Financial Statements 31 DECEMBER 2006
(Currency – Singapore dollars unless otherwise stated)
47. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
Interest rate risk
The Group has cash balances placed with reputable banks, financial institutions and a related corporation. The Group manages
its interest rate risks on its interest income by placing the cash balances in varying maturities and interest rate terms.
The Group’s debt includes bank borrowings and lease commitments. The Group seeks to minimise its interest exposure
through options to refinance the debt instruments and/or enter into interest rate swaps, where appropriate, over the duration
of its borrowings.
Information relating to the Group’s interest rate exposure is also disclosed in the notes on the Group’s borrowings, investments
and loan receivables, where applicable.
Foreign exchange risk
The Group’s foreign exchange risk arises both from its subsidiaries operating in foreign countries, which generate revenue
and incur costs denominated in foreign currencies and from those operations of its local subsidiaries which are in foreign
currencies.
The Group enters into forward currency contracts to hedge against its foreign exchange risk resulting from anticipated sale
and purchase transactions denominated in foreign currencies, primarily in US dollars and Euro.
Market risk
The Group has investments in quoted equity shares and bonds, and has placed funds with fund management companies. The
market value of these investments will fluctuate with market conditions. To mitigate market risk, the Group’s funds placed with
fund managers are guaranteed 95% to 100% of their principal values at the end of the fund management period. Also, before
a fund manager is given funds for management, its financial strength is carefully considered.
Liquidity risk
To manage liquidity risk, the Group monitors its net operating cash flows and maintains an adequate level of cash and cash
equivalents and secured committed funding facilities from financial institutions. In assessing the adequacy of these facilities,
management reviews its working capital requirements.
Credit risk
Credit risk, or the risk of counterparties defaulting, is managed through the application of credit approvals, credit limits and
monitoring procedures. Where appropriate, the Company or its subsidiaries obtain collaterals from customers or arrange
master netting agreements. Cash terms, advance payments, and letters of credit or bank guarantees are required for
customers of lower credit standing.
Counterparties to financial instruments consist of prime financial institutions and related corporations, as disclosed in Notes
10 and 16.
As at 31 December 2006, there were no significant concentrations of credit risk, except for 37% (2005: 43%) of trade debts
relating to three major customers of the respective subsidiaries.
48. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between
knowledgeable willing parties in an arm’s length transaction, other than in a forced or liquidation sale. Fair values are obtained
from quoted market prices, discounted cash flow models and option pricing models as appropriate.