Annual Report - AWB Limited

Notes to and forming part of the financial statements for the year ended 30 September 2008 AWB LIMITED31. Financial Risk Management Objectives and Policies (continued)Foreign Currency Exchange RiskForeign currency risk (or foreign exchange risk) arises on financial instruments that are denominated in a foreign currency, i.e. in a currency otherthan the functional currency in which they are measured. Currency risk does not arise from financial instruments that are non-monetary items.There are two types of currency risk - transaction risk and translation risk. Transaction risk arises when the Group enters into transactions thatwill be settled in the future in foreign currency. Translation risk is the risk that arises when the Group has assets and liabilities denominated in aforeign currency, whose carrying amounts will fluctuate with movements in foreign currency exchange rates.Group ExposureThe Group’s shareholders’ equity, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity ofthe Group’s sales and the countries in which it operates. Transaction risk arises from various activities of the Group. Such activities include themajority of physical as well as hedging contracts of wheat and other grains being denominated in USD whilst shipping contracts are also pricedin USD. Offshore subsidiaries will at various points in time pay dividends to the parent which will create transaction risk as the dividends will bedenominated in the subsidiaries’ transactional currency which is generally USD. From time to time, the Group will have small foreign currencytransactions which relate to purchases of supplies in foreign currencies.The functional currency of the Group’s Australian operations is AUD. The functional currencies of the Group’s international subsidiaries ispredominantly USD as the majority of revenues, operating costs and debt are denominated in USD. Therefore translation risk arises when theinternational subsidiaries’ accounts are translated into AUD for reporting purposes.Group Treasury will at times enter into derivative foreign exchange products such as currency options, cross currency contracts (spot and forwards)and currency swaps for proprietary purposes within the Board delegated limits. Such transactions create foreign exchange risk for the Group.Management of ExposureGroup Treasury actively manages the foreign exchange risk for the Group by monitoring the foreign exchange markets and where appropriateentering into hedges. Hedging instruments include cross currency contracts (spot and forward), currency swaps and currency options.It is the Group’s policy to hedge the majority of transactional exposures to foreign currencies arising from forward sale and purchase commoditycontracts. These commodity contracts are entered into by the Group to manage against commodity price risk that arises as a result of commodityprices being denominated and at expiry, being settled in foreign currencies. Business units are required to identify their transactional exposuresand notify Group Treasury which will then enter into the appropriate hedge.Translation exposures arising from translating offshore subsidiaries into AUD for reporting purposes are not hedged. However, should anoffshore subsidiary pay a dividend to the parent, the foreign currency transaction will be hedged at the point in time the dividend is declared.Foreign currency exposure/sensitivity analysis as at balance dateA 1 cent movement in the US dollar against the Australian dollar would have a $0.8 million impact on post tax profit/(loss) on net monetaryassets/(liabilities) excluding hedging of future commodity purchases and sales.As at balance date, the Group’s foreign currency exposure before taking into account foreign currency derivatives that have been entered into aseconomic hedges to hedge future foreign currency receipts that will arise from settlement of forward purchase and sale commodity contracts isas follows (note - all sensitivity amounts are tax effected, the parent entity does not directly have exposure to foreign exchange):www.awb.com.au 103