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23 Management of financial risks (continued)

Energy risk

The group operates risk management processes for the group’s energy costs associated with its activities. The group’s energy policy is set out and reviewed by an energy committee which meets regularly to review pricing exposure to electricity and gas consumption and determines strategy for forward purchasing and hedging of energy costs.

Sensitivity analysis

The following analysis illustrates the sensitivity of the group’s financial instruments to changes in market variables, namely UK interest rates and the US dollar, euro and Hong Kong dollar to sterling exchange rates.

The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-retirement obligations and provisions.

The analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating rate borrowings and the proportion of financial instruments in foreign currencies are constant throughout the year, based on average balances and rates during the year. As a consequence, this sensitivity analysis is not representative of the financial years in total.

The following assumptions have been made in calculating the sensitivity analysis:

• the sensitivity of interest costs to movements in interest rates is calculated on average floating rate debt and investment balances prevailing during the financial year;
• changes in the carrying value of derivatives designated as fair value hedges arising from movements in interest rates are assumed to have no effect on net assets;
• changes in the carrying value of derivative financial instruments not in hedging relationships are assumed only to affect the income statement; and
• all derivative instruments designated as hedges are assumed to be fully effective.

2010 2009

Income statement Equity Income statement Equity
+/– £m +/– £m +/– £m +/– £m

UK interest rates +/– 5% 3.8 – 11.0 –
US dollar exchange rate +/– 15% 3.6 4.2 – 2.3
Euro exchange rate +/– 10% 0.4 5.4 – 2.3
Hong Kong dollar exchange rate +/– 15% 0.3 0.6 – 0.2