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BAKKAVOR ANNUAL REPORT AND ACCOUNTS 2012
notes to the consolidated financial statements
continued
29
FINANCIAL INSTRUMENTS CONTINUED
Market risk
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into
a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including:
• Forward foreign exchange contracts to hedge the exchange rate risk arising on revenues and purchases in foreign currencies.
• Interest rate swaps to mitigate the risk of rising interest rates.
Market risk exposures are supplemented by sensitivity analysis. There has been no change to the Group’s exposure to market risks or the manner in
which it manages and measures the risk.
Foreign currency risk management
Foreign currency risk management occurs at a transactional level on revenues and purchases in foreign currencies and at a translational level in
relation to the translation of overseas operations. Board policy is for Group Treasury to hedge a rolling 12 month forecast of transactional exposures
using forward foreign exchange contracts and foreign exchange options. The Group monitors foreign exchange rates to assess the potential impact on
group profits if exchange rates move significantly and a summary of hedges in place are reported monthly to the Board of Directors.
The Group’s main foreign exchange risk is to the Euro and US dollar.
During the 52 week period to 29 December 2012, the Euro weakened against Sterling by 2.1%, with the closing rate at €1.2219 compared to
€1.1972 at the prior period end. The average rate for the 52 week period to 29 December 2012 was €1.2335, a weakening of the Euro of 7.0%
versus prior year.
In the same period the US dollar, weakened against Sterling by 4.0%, with the closing rate at $1.6155 compared to $1.5541 at the prior period end.
The average rate for the period to 29 December 2012 was $1.5851, a 1.2% strengthening of the US dollar versus the prior year.
The net foreign exchange impact on profit from transactions is a gain of £0.4 million (2011: loss of £0.3 million).
Foreign currency sensitivity analysis
A sensitivity analysis has been performed on the financial assets and liabilities to a sensitivity of 10% increase/decrease in the exchange rates.
A 10% increase/decrease has been used, and represents management’s assessment of the reasonably possible change in foreign exchange rates.
The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a
10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where
the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in
profit where Sterling strengthens 10% against the relevant currency.
Profit or (loss)
Profit or (loss)
10% Strengthening 10% Weakening
29 December 31 December 29 December 31 December
£m 2012 2011 2012 2011
Euro (1.4) (1.1) 1.8 1.2
USD (1.3) (1.0) 1.6 1.1
RMB (0.1) 0.1 0.1 (0.1)
ZAR (0.2) (0.2) 0.2 0.2
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