Financial Statements - Solvay

100
Solvay Global Annual Report 2008
(31) Derivative fi nancial instruments
The Solvay group uses derivatives to hedge clearly identifi ed foreign exchange and interest rate risks (hedging
instruments). However, the required criteria to apply hedge accounting according to IFRS are not met in all cases.
This means that this form of accounting is not always applicable when the Group covers its economic risks.
The Group’s exchange risk hedging policy is based essentially on the principles of fi nancing its activities in local currency,
systematically hedging transactional exchange risk at the time of invoicing (risks which are certain) and monitoring and
hedging where appropriate exchange rate positions generated by the Group’s activities, based on expected cash fl ows.
Currency translation differences
Exchange rate fl uctuations, particularly of the US dollar, can affect earnings. In the course of 2008 the EUR / USD
exchange rate moved from 1.4721 at the start of January to 1.3917 at the end of December. The average rate in 2008
(1.4708) compared to the average rate in 2007 (1.3706) clearly shows a weaker USD in 2008.
Managing the exchange risk on debt
Group borrowings are generally carried out by the Group’s fi nancial companies, which make the proceeds of
these borrowings available to the operating entities.
The choice of borrowing currency depends essentially on the opportunities offered by the various markets. This means
that the selected currency is not necessarily that of the country in which the funds will be invested. Nonetheless, operating
entities are fi nanced in their own local currencies, with this currency being obtained, where appropriate, by currency
swaps against the currency held by the fi nancing company. The cost of these currency swaps is included under the cost
of borrowing. These enable us to limit the exchange risk both in the fi nancial company and in the company fi nally using
the funds.
In emerging countries it is not always possible to borrow in local currency, either because local fi nancial markets are too
narrow and funds are not available, or because the fi nancial conditions are too onerous. In such a situation the Group
has to borrow in a different currency. Nonetheless the Group has taken advantage of any opportunities to refi nance
its borrowing in emerging countries with local currency debt. In this way, at the end of 2008, the Group had a very limited
foreign exchange exposure on its residual currency borrowings in Bulgaria.
Managing the translation exchange risk
The translation exchange risk is the risk affecting the Group’s consolidated accounts related to subsidiaries operating in
a currency other than the EUR (the Group’s functional currency).
a) Currency translation risk in the income statement
For the Solvay group, this risk relates mainly to the translation into EUR of earnings generated in the NAFTA region. Based
on the expected net earnings in the NAFTA region for the period in question and depending on market conditions, steps
may be taken to hedge this translation risk.
During 2008, the Solvay group did not hedge the income statement currency translation risk.