32. Financial risk management and financial instruments
136 Annual Report 2009 - Heineken N.V.
Notes to the consolidated financial statements
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 currencies that give
rise to this risk are the US dollar and British pound.
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 to 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. Given the limited availability of efficient and effective hedging instruments
hedging levels are temporarily below policy in a number of Central and Eastern European countries. The
majority of the forward exchange contracts have maturities of less than one year after the balance sheet
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. The result of the net investment hedging is
recognised in the translation reserve as can be seen in the consolidated statement of comprehensive income.
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 in foreign currencies is mainly
in British pounds, US dollars, Russian roubles and Polish zloty. In some cases Heineken elects to treat intra-
Heineken financing with a permanent character as equity and does not hedge the foreign currency exposure.
The principal amounts of Heineken's British pound, 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 without
derivatives being 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-