111
Notes to the Consolidated Financial Statements (continued)
Market risk
Foreign currency risk
Report of the
Report of the
Financial
Sustainability
Other
Introduction
Executive Board
Supervisory Board
Statements
Review
Information
Heineken N.V. Annual Report 2017
The total carrying amount and contractual cash flows of derivatives are included in trade and other receivables (refer to note 20), other
investments (referto note 17), trade and other payables (referto note 29) and non-current non-interest-bearing liabilities (referto note 25).
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, commodity prices and equity prices, will adversely
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, while optimising the return on risk.
HEINEKEN uses derivatives in the ordinary course of business, and also incurs financial liabilities, in orderto manage market risks. Generally
HEINEKEN seeks to apply hedge accounting or make use of natural hedges in orderto minimise the effects of foreign currency fluctuations in profit
or loss.
Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, commodity swaps, spot and forward exchange
contracts and options. Transactions are entered into with a limited number of counterparties with strong credit ratings. Foreign currency, interest
rate and commodity hedging operations are governed by internal policies and rules approved and monitored by the Executive Board.
HEINEKEN is exposed to foreign currency risk on (future) sales, (future) purchases, borrowings and dividends 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, Mexican peso,
Nigerian naira, British pound, Vietnamese dong and Euro. In 201 7, the transactional exchange risk was hedged in line with the hedging policy
to the extent possible, the resulting impact from currency movements was therefore partly mitigated. The negative translational impact was
more profound.
In managing foreign currency risk, HEINEKEN aims to ensure the availability of these foreign currencies and to reduce the impact of short-term
fluctuations on earnings. Over the longer term, however, permanent changes in foreign exchange rates and the availability of foreign currencies,
especially in emerging markets, will have an impact on profit.
HEINEKEN hedges up to 90% of its net US dollar export 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. The majority of the forward exchange contracts have maturities of less than one year after
the balance sheet date.
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, Polish zloty and New Zealand
dollar. In some cases, HEINEKEN elects to treat intra-HEINEKEN financing with a permanent character as equity and does not hedge the foreign
currency exposure.
HEINEKEN maintains debt in foreign currencies like US dollar and British pound 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.
In respect of other monetary assets and liabilities denominated in currencies otherthan 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.