Notes to the consolidated financial statements
118 Financial statements
30. Financial risk management and financial instruments
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and
equity prices will affect Heineken's income or the value of its holdings of financial instruments. The
objective of market risk management is to manage and control market risk exposures within acceptable
parameters, whilst optimising the return on risk.
Heineken uses derivatives in the ordinary course of business, and also incurs financial liabilities, in order
to manage market risks. Generally Heineken seeks to apply hedge accounting in order to minimise the
effects of foreign currency fluctuations in the income statement.
Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, forward
exchange contracts and options. Transactions are entered into with a limited number of counterparties
with strong credit ratings. Foreign currency and interest rate hedging operations are governed by an
internal policy and rules approved and monitored by the Executive Board.
Foreign currency risk
Heineken is exposed to foreign currency risk on sales, purchases and borrowings that are denominated
in a currency other than the respective functional currencies of Heineken entities. The main currency
that gives rise to this risk is the US Dollar.
In managing foreign currency risk Heineken aims to reduce the impact of short-term fluctuations on
earnings. Over the longer term, however, permanent changes in foreign exchange rates would have an
impact on profit.
Heineken hedges up to 90 per cent of its mainly intra-Heineken US Dollar cash flows on the basis of
rolling cash flow forecasts in respect of forecasted sales and purchases. Cash flows in other foreign
currencies are also hedged on the basis of rolling cash flow forecasts. Heineken mainly uses forward
exchange contracts to hedge its foreign currency risk. The majority of the forward exchange contracts
have maturities of less than one year after the balance sheet date. Where necessary, the forward
exchange contracts are rolled over at maturity.
The Company has a clear policy on hedging transactional exchange risks, which postpones the impact
on financial results. Translation exchange risks are hedged to a limited extent, as the underlying
currency positions are generally considered to be long-term in nature.
It is Heineken's policy to provide intra-Heineken financing in the functional currency of subsidiaries where
possible to prevent foreign currency exposure on subsidiary level. The resulting exposure at Group level
is hedged by means of forward exchange contracts. Intra-Heineken financing is mainly in US Dollars,
Russian Rubles and Polish Zloty.
The principal amounts of Heineken's Chilean Peso, Polish Zloty and Egyptian Pound bank loans and bond
issues are used to hedge local operations, which generate cash flows that have the same respective
functional currencies. Corresponding interest on these borrowings is also denominated in currencies
that match the cash flows generated by the underlying operations of Heineken. This provides an
economic hedge and no derivatives are entered into.
In respect of other monetary assets and liabilities denominated in currencies other than the functional
currencies of the Company and the various foreign operations, Heineken ensures that its net exposure
is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to
address short-term imbalances.
Heineken N.V. Annual Report 2007
