Prospectus - Fonterra

51Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Interest rate riskThe Company’s interest rate risk arises from its borrowings and funds on deposit. Borrowings issued and fundson deposit held at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixedrates expose the Company to fair value interest rate risk.The Company borrows a mixture of fixed and variable rate debt in a range of currencies. The Company activelyhedges its repricing profile using interest rate swaps in accordance with its Treasury Policy in order to minimisethe cost of debt and manage the volatility of finance costs. The Company’s benchmark is to ensure between 20%and 55% of interest payments are fixed depending upon the maturity of the debt.Exposure to interest rate riskSensitivities to interest rate risk have been assessed on the basis of a 100 basis point movement in interest rates.A 100 basis point movement is considered reasonably possible over the short term. Sensitivities are presentednet of tax based on a tax rate of 33%.Fair value sensitivity analysisA change in interest rates impacts the fair value of the Company’s fixed rate debt instruments and its interest ratederivatives. Fair value changes impact on profit or loss for all interest rate derivatives and where hedged risks oncertain debt instruments are recognised at fair value. All such fair value changes are recognised in the incomestatement. The fair value sensitivity to a 100 basis point movement in interest rates (based on financial assetsand liabilities held at the reporting date) is as follows:$ millionAs atAs at31 July 2008 31 May 2007Fair value gain/(loss) from 100 bp increase 41 38Fair value gain/(loss) from 100 bp decrease (44) (41)Cash flow sensitivity analysisA change in the interest rates would also impact on interest payments and receipts on the Company’s floating ratedebt instruments (including the floating leg of any interest rate derivatives) recognised in the income statement.The cash flow sensitivity to a 100 basis point movement in interest rates (based on financial assets and liabilitiesheld at the reporting date) is as follows:$ millionAs atAs at31 July 2008 31 May 2007One year cash flow impact of 100 bp increase 16 13One year cash flow impact of 100 bp decrease (16) (13)