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Increase/
decrease in
basis points Effect on equity
126 Notes to Consolidated Financial Statements
Effect on profit
before tax
2010
USD +5 112 6
USD -10 (158) (9)
Increase/
decrease in
basis points Effect on equity
Effect on profit
before tax
2009
USD +5 (79) 9
USD -10 (312) (17)
Foreign currency risk
Foreign currency risk is the risk that changes in foreign
exchange rates will affect the Company’s income or the
value of its holdings of financial instruments. Many of
the Company’s subsidiaries are located outside the US.
Individual subsidiaries execute their operating activities in
their respective functional currencies which are primarily
comprised of the US Dollar and Euro. Since the financial
reporting currency of the Company is US Dollar, the
financial statements of those non US Dollar operating
subsidiaries are translated so that the financial results
can be presented in the Company’s consolidated financial
statements.
Each subsidiary conducting business with third parties
that leads to future cash flows denominated in a currency
other than its functional currency is exposed to the
risk from changes in foreign exchange rates. It is the
Company’s policy to use forward currency contracts to
minimize the currency exposures on net cash flows. For
certain subsidiaries, this includes managing balance
sheet positions in addition to forecast and committed
transactions. For these contracts, maturity dates are
established at the end of each month matching the net
cash flows expected for that month. Another subsidiary
hedges all sales transactions in excess of a certain
threshold. For this subsidiary, the contracts mature at
the anticipated cash requirement date. Most forward
exchange contracts mature within twelve months and are
predominantly denominated in US Dollars, British Pound
Sterling, Brazilian Reais and Euros. When established,
the forward currency contract must be in the same
currency as the hedged item. It is the Company’s policy
to negotiate the terms of the hedge derivatives to closely
match the terms of the hedged item to maximise hedge
effectiveness. The Company seeks to mitigate this risk
by hedging at least 70% of transactions that occur in a
currency other than the functional currency.
In respect of monetary assets and liabilities denominated
in foreign currencies, the Company ensures that its
net exposure is kept to an acceptable level by buying or
selling foreign currencies at spot rates when necessary to
address short term imbalances.
The Company deems its primary currency exposures
to be in US Dollars and Euros. The following table
demonstrates the sensitivity to a reasonably possible
change in the two functional currencies of the Company:
US Dollar and Euro exchange rates with all other variables
held constant, of the Company’s profit before tax (due
to changes in the fair value of monetary assets and
liabilities) and the Company’s equity (due to changes in
the fair value of forward exchange contracts). Changes in
sensitivity rates reflect various changes in the economy
year-over-year.
Strengthening/
weakening
in functional rate
Effect on
profit
before tax
Effect on
equity
before tax
2010
US Dollar +5% (825) 93
Euro +5% (296) (214)
US Dollar -5% 825 (93)
Euro -5% 296 214
Strengthening/
weakening
in functional rate
Effect on
profit
before tax
Effect on
equity
before tax
2009
US Dollar +5% (227) 515
Euro +5% (182) (80)
US Dollar -5% 227 (515)
Euro -5% 182 80
Commodity price risk
Commodity price risk is the risk that certain raw
materials prices will increase and negatively impact the
gross margins and operating results of the Company.
The Company is exposed to volatility in the prices of
raw materials used in some products and uses forward
contracts to manage these exposures. For certain metals,
the Company aims to maintain a greater than 50% hedged
position in order to avoid undue volatility in the sales
prices and purchase costs attained in the normal course
of business. Commodity forward contracts are generally
settled within twelve months of the reporting date.
Changes in sensitivity rates reflect various changes in the
economy year-over-year.