Notes to the accounts
23 Management of financial risks (continued)
Interest on borrowings is calculated based on the borrowing position at the financial year end without taking account of future issues. Future floating rate interest liabilities are estimated using the forward interest rate curve as at the relevant year end date.
For the purposes of this note, the foreign currency element of forward foreign currency contracts is translated at spot rates prevailing at the year end.
Interest rate risk
In order to manage the risk of interest rate fluctuations the group targets a ratio of fixed and floating rate debt in line with the Board approved treasury policy. An analysis of the group’s financial liabilities is detailed in note 26. Exposures to interest rate fluctuations are managed using interest rate swaps. Interest rate swaps have been used to convert £150.0m (2009: £150.0m) of fixed rate bond debt to floating rate. These swaps have a maturity and payment profile which matches the underlying 6.375% 2012 bond and have been accounted for as fair value hedges under IAS 39. The movement in the fair value of the swaps and of the underlying hedged item attributable to the hedged risk is £2.7m.
Foreign currency risk
The group uses derivatives to manage exposures to movements in exchange rates arising from transactions with foreign suppliers. Foreign currency exposures are hedged primarily using forward foreign exchange contracts covering up to 100% of forecast exposures on a rolling basis. Forward foreign exchange contracts used to hedge forecast currency requirements are designated as cash flow hedges with fair value movements recognised in equity. Derivatives that were designated as cash flow hedges during the year were fully effective. At the balance sheet date, forward currency contracts of £105.7m (2009: £41.3m) and currency options of £nil (2009: £4.7m) had been entered into to hedge purchases in foreign currencies. At the year end £8.0m (2009: £7.3m) of a total of £8.2m (2009: £7.9m) of liabilities denominated in foreign currency were covered in this way.
The group has no significant exposure to customer credit risk. Cash deposits and other financial instruments give rise to credit risk on the amounts due from counterparties. These risks are managed by restricting such transactions to counterparties with a credit rating not less than a Standard & Poor’s equivalent ‘A’ rating.
The group considers its maximum exposure to credit risk is as follows:
Trade and other receivables 110.3 89.2
Cash and cash equivalents 560.0 197.6
The group’s objective is to maintain a capital structure which is consistent with an investment grade credit rating. Although the group does not have a credit rating, it monitors capital risk using a number of capital ratios commonly used by rating agencies to assess risk. These ratios help the Board to establish levels of debt that the group should not exceed, other than for relatively short periods of time.