Osim FR 050407.indd

Notes to the Financial Statements - 31 December 2006 (cont’d)42. Financial risk management objectives and policies (cont’d)The main risks arising from the Group’s fi nancial instruments are interest rate risks (both fair value and cash fl ow), liquidity risk,foreign currency risk and credit risk. The board reviews and agrees policies for managing each of these risks and they are summarisedbelow. The Group’s accounting policies in relation to derivative fi nancial instruments are set out in Note 2.28.a) Interest rate riskThe Group obtains additional fi nancing through bank borrowings and leasing arrangements. The Group’s policy is to obtainthe most favourable interest rates available without increasing its foreign currency exposure. Surplus funds are placed withreputable banks and/or fi nancial institutions.The Group’s policy is to manage its exposure to interest risks using a mix of fi xed and variable rate debts. The Group’s policyis to keep between 30% to 75% of its bills payable for working capital at fi xed rates of interest. As at 31 December 2006, aftertaking into account an interest rate swap, approximate 61% (2005: 40%) of the Group’s bills payables for working capital areat fi xed rate.The Group’s policy is to hedge 100% of the term loan for investment in joint venture. As at 31 December 2006, the Grouphas entered into two interest rate swaps to hedge 100% (2005: 100%) of the term loan.b) Liquidity riskIn the management of liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequateby management to fi nance the Group’s operations and mitigate the effect of fl uctuations in cash fl ows.c) Foreign exchange riskThe Group’ foreign exchange risk arises both from its subsidiaries operating in foreign countries, which generate revenueand incur costs denominated in foreign currencies and from those operations of its local subsidiaries which are in foreigncurrencies.The Group uses foreign exchange contracts in managing its foreign exchange risk resulting from cash fl ows from anticipatedtransactions and fi nancing arrangements denominated in foreign currencies, primarily the United States dollars and JapaneseYen. Transaction risk is calculated in each foreign currency and includes foreign currency denominated assets and liabilitiesand fi rm and probable purchase and sale commitments.Notes to the Financial Statements 162Annual Report 2006