McPHERSON’S LIMITED
ANNUAL REPORT 2015
63
NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are only used for economic hedging purposes and not as trading or speculative instruments. The Group has the following financial
instruments:
2015
$’000
2014
$’000
Current assets
Forward foreign exchange contracts – cash flow hedges
1,109
-
Foreign currency options – cash flow hedges
842
-
Total current derivative financial instrument assets
1,951
-
Current liabilities
Interest rate contracts – cash flow hedges
409
834
Forward foreign exchange contracts – cash flow hedges
12
1,952
Foreign currency options – cash flow hedges
790
1,068
Total current derivative financial instrument liabilities
1,211
3,854
Non-current liabilities
Interest rate contracts – cash flow hedges
1,601
978
(A) INSTRUMENTS USED BY THE GROUP
The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and
foreign exchange rates in accordance with the Group’s financial risk management policies (refer to Note 2). For information about the methods
and assumptions used in determining the fair value of derivatives please refer to Note 2(E).
Forward foreign exchange contracts – cash flow hedges
The Group enters into forward foreign exchange contracts to hedge highly probable forecast purchases denominated in foreign currencies. The
terms of these commitments are predominately eight months or less.
Foreign currency options – cash flow hedges
The Group has also entered into foreign currency option contracts to partially hedge a portion of anticipated United States dollar purchases. At
balance date, the outstanding foreign currency option contracts cover the period from July 2015 to February 2016.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the
cash flows occur, the Group adjusts the initial measurement of the component recognised in the balance sheet by the related amount deferred in
equity.
Interest rate swap contracts - cash flow hedges
The Group has entered into an interest rate swap contract to reduce its exposure to possible increases in interest rates. Refer to Note 2 for further
information.
(B) CREDIT RISK EXPOSURE
Credit risk arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity.
Foreign exchange contracts, foreign currency options and interest rate swaps are subject to credit risk in relation to the relevant counterparties,
which are major banks. The maximum credit risk exposure on hedging contracts is the full amount the Group pays when settlement occurs should
the counterparty fail to pay the amount which it is committed to pay to the Group.
(C) INTEREST RATE AND FOREIGN EXCHANGE RISK
For an analysis of the sensitivity of derivatives to interest rate and foreign exchange risk refer to Note 2. There are no material sources of
ineffectiveness in the Group’s hedge relationships.