Notes to the Consolidated Financial Statements (continued)
Exposure to foreign currency risk
Interest rate risk
Report of the
Report of the
Annual Report 2016
HEINEKEN 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 a subsidiary level. The resulting exposure at Group level is hedged by means of foreign currency denominated external debts and by
forward exchange contracts. Intra-HEINEKEN financing in foreign currencies is mainly in British pounds, US dollars, Swiss francs, South African rand
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 US dollar, British pound, Nigerian naira, Singapore dollar bank loans and bond issues are used to hedge local
operations, which generate cash flows that have the same respective functional currencies or have functional currencies that are closely correlated.
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 HEINEKEN 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's transactional exposure to the US dollar and Euro was as follows based on notional amounts. The Euro column relates to transactional
exposure to the Euro within subsidiaries which are reporting in other currencies. Included in the amounts are intra-HEINEKEN cash flows.
Gross balance sheet exposure
Estimated forecast sales next year
Estimated forecast purchases next year
Net notional amounts foreign exchange contracts
Profit or loss
A 10% strengthening of the US dollar against the Euro or, in case of the Euro, a strengthening of the Euro against all other currencies as at
31 December would have affected the value of financial assets and liabilities (related to transactional exposure) recorded on the balance sheet
and would have therefore decreased (increased) equity and profit by the amounts shown above. This analysis assumes that all other variables,
in particular interest rates, remain constant.
A 10% weakening of the US dollar against the Euro or, in case of the Euro, a weakening of the Euro against all other currencies as at 31 December
would have had the equal but opposite effect on the basis that all other variables remain constant.
In managing interest rate risk, HEINEKEN aims to reduce the impact of short-term fluctuations on earnings. Over the longer term, however,
permanent changes in interest rates would have an impact on profit.
HEINEKEN opts for a mix of fixed and variable interest rates in its financing operations, combined with the use of interest rate instruments. Currently,
HEINEKEN's interest rate position is more weighted towards fixed than floating. Interest rate instruments that can be used are interest rate swaps,
forward rate agreements, caps and floors.
Swap maturity follows the maturity of the related loans and borrowings which have swap rates for the fixed leg ranging from 3.8 to 6.5%
(2015: from 3.8 to 7.3%).