Annual Report and Accounts 2006 - DCC plc

32financial reviewsubsidiary management, inconjunction with Group Treasury,manage foreign exchange andcommodity price exposures withinapproved policies and guidelines.Further detail in relation to the Group’sfinancial risk management and itsderivative financial instrument positionis contained in Note 2 and Note 28respectively to the financialstatements.Foreign exchange riskmanagementDCC’s reporting currency and that inwhich its share capital is denominatedis the euro. Exposures to othercurrencies, principally sterling and theUS dollar, arise in the course ofordinary trading. The Group generallyhedges between 50% and 90% oftransactions in each major currencyfor the subsequent 2 months. TheGroup also hedges approximately50% of anticipated transactions incertain subsidiaries, generally forperiods up to 6 months with suchtransactions qualifying as ‘highlyprobable’ forecast transactions for IAS39 hedge accounting purposes.Although over half of the Group’soperating profits are sterlingdenominated, certain naturaleconomic hedges exist within theGroup, for example, a proportion ofthe purchases by certain of its Irishbusinesses are sterling denominated.The Group did not hedge theremaining retranslation exposureduring the financial year ended31 March 2006.The Group has investments in sterlingoperations which are highly cashgenerative. The Group seeks tomanage the resultant foreign currencytranslation risk through borrowingsdenominated in or swapped (utilisingcurrency swaps or cross currencyinterest rate swaps) into sterling,although this is more than offsetby the strong cumulative cashflow generated from the Group’ssterling operations.anticipated LPG commodity priceexposure for the subsequent month,with such transactions qualifying as‘highly probable’ forecast transactionsfor IAS 39 hedge accounting purposes.Certain customers occasionally requirefixed price oil supply contractsgenerally for periods of less than sixmonths. In such circumstances, theGroup enters into matching forwardcommodity contracts, not designatedas hedges under IAS 39.All commodity hedging counterpartiesare approved by the Board.Credit risk managementDCC transacts with a variety of highcredit quality financial institutions forthe purpose of placing deposits andentering into derivative contracts. TheGroup actively monitors its creditexposure to each counterparty toensure compliance with limitsapproved by the Board.Interest rate riskand debt/liquidity managementThe Group maintains a strong balancesheet with long-term debt funding andcash balances with deposit maturitiesup to six months. In addition, theGroup maintains significantuncommitted credit lines with itsrelationship banks. DCC borrows atboth fixed and floating rates ofinterest. It has swapped its fixed rateborrowings to floating interest rates,using interest rate and cross currencyinterest rate swaps which qualify forfair value hedge accounting under IAS39. The Group mitigates interest raterisk on its borrowings by matching, tothe extent possible, the maturity of itscash balances with the interest ratereset periods on the swaps relatedto its borrowings.Commodity price riskmanagementThe Group is exposed to commodityprice risk in its LPG and oil distributionbusinesses. The Group generallyhedges approximately 50% of its