Annual Report 2012 - IOI Group

NOTES TO THEFINANCIAL STATEMENTS42. FINANCIAL INSTRUMENTS (Continued)42.1 Foreign currency risk (Continued)42.1.2 Foreign currency risk exposure (Continued)Company2012i. Cross currency swap to swap fixed rate USD liability of USD104.1 million to fixed rate EUR liability of EUR80.0million. The contract effectively swapped part of the Group’s fixed rate Guaranteed Notes into fixed rate EURliability. This was done to maintain the appropriate amount of liability in EUR as a natural hedge againstexisting EUR denominated investment in subsidiaries. The effective period for this cross currency swap is fromFebruary 2005 to February 2015.2011i. Cross currency swap to swap fixed rate USD liability of USD104.1 million to fixed rate EUR liability of EUR80.0million. The contract effectively swapped part of the Group’s fixed rate Guaranteed Notes into fixed rate EURliability. This was done to maintain the appropriate amount of liability in EUR as a natural hedge againstexisting EUR denominated investment in subsidiaries. The effective period for this cross currency swap is fromFebruary 2005 to February 2015.ii.Cross currency swaps to swap floating rate USD liability of USD100.0 million to fixed rate RM liability ofRM351.5 million. These were entered into as a cash flow hedge for the Group’s principal repayment for theloan obtained. The effective period for these cross currency swaps is from February 2009 to March 2012.42.1.3 Sensitivity analysis42.2 Interest rate riskThe Group’s exposure to foreign currency risk primarily from foreign currency denominated borrowings. A 1,000 pipsincrease or decrease in foreign currency rate of foreign currency denominated borrowings would have equallydecreased or increased the profit for the Group and the Company by approximately RM232 million (2011 – RM146million) and RM60 million (2011 – RM60 million) respectively.The Group’s interest rate risk arises from its interest bearing financial instruments that could impact fair value and future cashflows due to fluctuation in market interest rates.The Group’s objective on interest rate risk management is to achieve a balance in re-pricing risks and the optimisation of itscost of funds whilst ensuring sufficient liquidity to meet funding needs.42.2.1 Risk management approachThe Group actively reviews its debt portfolio, taking into account the nature and requirements of its businesses aswell as the current business and economic environment. This strategy allows it to achieve an optimum cost ofcapital whilst locking in long term funding rates for long term investments.Funds held for liquidity purposes and temporary surpluses are placed in short term interest bearing financialinstruments. Changes in market interest rates will be re-priced immediately into these floating interest bearingfinancial instruments.220IOI CORPORATION BERHADAnnual Report 2012