axiata group berhad | annual report 2015
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38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
(a) Market risks consist of:
(i)
foreign currency exchange risk – risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.
(ii) fair value interest rate risk – risk that the value of a financial instrument will fluctuate due to changes in market interest rates.
(iii) cash flow interest rate risk – risk that future cash flows associated with a financial instrument will fluctuate. In the case of a floating rate debt
instrument, such fluctuations result in a change in the effective interest rate of the financial instrument, usually without a corresponding
change in its fair value.
(iv) price risk – risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are
caused by factors specific to the individual instrument or its issuer or factors affecting all instrument traded in the market.
(b) Credit risk – risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.
(c) Liquidity risk (funding risk) – risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments.
The Group’s and the Company’s overall financial risk management programme focuses on the unpredictability of financial markets and seeks to
minimise potential adverse effects on the financial performance of the Group and the Company. Financial risk management is carried out through
risk reviews, internal control systems, insurance programmes and adherence to the Group’s and the Company’s financial risk management policies.
The Board of Directors regularly reviews these risks and approves the treasury policies, which covers the management of these risks. Hedging
transactions are determined in the light of commercial commitments. Derivative financial instruments are mainly used to hedge underlying
commercial exposures.
(a) Market risks
(i) Foreign currency exchange risk
Group
The foreign exchange risk of the Group predominately arises from borrowings denominated in foreign currencies. The main currency
exposure from borrowings denominated in foreign currency is USD. The Group has cross currency interest rate swaps, forward foreign
currency contracts and call spread options that are primarily used to hedge selected foreign currency borrowings to reduce the foreign
currency exposures on these borrowings.
The Group has certain investment in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency
exposure arising from the net assets of the Group’s foreign operation is managed primarily through borrowings denominated in the
relevant foreign currency and also the use of cross currency swap.
As at 31 December 2015, if USD has strengthen/weakened by 10% against IDR, BDT, SLR and RM with all other variables held constant,
this will result in foreign exchange losses/gains to the profit or loss of RM315.0 million for the Group on translation of USD denominated
non-hedged borrowings.
Company
The foreign exchange risk of the Company predominately arises from advances to subsidiaries treated as quasi investment denominated
in USD.
As at 31 December 2015, if USD has strengthen/weakened by 10% against RM with all other variables held constant, this will result in
foreign exchange gains/losses to the profit or loss of RM859.1 million for the Company, on translation of USD denominated advances to
subsidiaries treated as quasi investment.
