2011 - Li & Fung Limited

36 FINANCIAL RISK MANAGEMENT
NOTES TO THE ACCOUNTS (CONTINUED)
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, fair value interest rate risk,
cash flow interest rate risk and price risk), credit risk, and liquidity risk. The Group’s overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses
derivative financial instruments to hedge certain risk exposures.
(a) MARKET RISK
(i) Foreign exchange risk
The Group operates globally with almost all of its sales and purchases traded in foreign currencies, mostly in US dollar. HK dollar is
pegged to US dollar at a range between 7.75 to 7.85 and the foreign exchange exposure between US dollar and HK dollar is therefore
limited.
The Group is exposed to foreign exchange risk arising from various currency exposures mainly to the extent of its receivables and
payables in currencies other than US dollar, such as Euro dollar and Sterling Pound. To minimize such risks, sales and purchases are
generally transacted in the same currency.
Foreign exchange risk arising from sales and purchases transacted in different currencies are managed by the Group treasury through
the use of foreign exchange forward contracts. Pursuant to the Group policy in place, foreign exchange forward contracts, or any other
financial derivatives, are entered into by the Group for hedging purposes. The Group has not entered into any financial derivatives for
speculation.
The Group’s cash is mainly kept in either HK dollar or US dollar to minimize the foreign exchange risk.
At 31 December 2011, if the major foreign currencies, such as Euro dollar and Sterling Pound, to which the Group had exposure to had
strengthened/weakened by 10% (2010: 10%) against US and HK dollar with all other variables held constant, profit for the year and
equity would have been approximately 2.0% (2010: 2.0%) and 2.0% (2010: 2.0%) higher/lower, mainly as a result of foreign exchange
gains/losses on translation of foreign currencies denominated trade receivables, available-for-sale financial assets, borrowings and
intangible assets.
(ii) Price risk
The Group is exposed to equity securities price risk because of investments held by the Group and classified on the consolidated
balance sheet as available-for-sale financial assets. The Group maintains these equity securities investments for long-term strategic
purposes and the Group’s overall exposure to price risk is not significant.
At 31 December 2011 and up to the report date of the accounts, the Group held no material financial derivative instruments except
for certain foreign exchange forward contracts entered into for hedging of foreign exchange risk exposure on sales and purchases
transacted in different currencies. At 31 December 2011, the fair value of foreign exchange forward contracts entered into by the Group
amounted to US$13,743,000 (2010: liabilities of US$1,892,000), which has been reflected in full in the Group’s consolidated balance
sheet as derivative financial instruments assets.
LI & FUNG LIMITED | ANNUAL REPORT 2011 143