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McPHERSON’S LIMITED

ANNUAL REPORT 2015

NOTE 2. FINANCIAL RISK MANAGEMENT (CONTINUED)

(A) FOREIGN EXCHANGE RISK

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the

United States dollar. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a

currency that is not the entity’s functional currency and net investment in foreign operations.
The Board’s risk management policy is to hedge 100% of anticipated cash flows (mainly inventory purchases) in United States dollars for

approximately eight months subsequent, subject to a review of the cost of implementing each hedge. At balance date 100% (2014: 100%) of

projected USD purchases qualified as “highly probable” forecast transactions for hedge accounting purposes. The Group also hedges material

exposures arising in foreign currencies other than USD. The Group uses a mixture of foreign currency options and forward exchange contracts to

hedge its exposures to foreign currency. The weighted average hedged rate for the AUD/USD hedges the Group had in place at 30 June 2015 was

$0.7688 (2014: $0.8802).
The Group’s exposure to foreign currency risk (being unhedged payable and receivable amounts, and outstanding hedges associated with forecast

future transactions) at the reporting date was as follows:

$’000

USD

NZD

EURO

GBP

RMB

CHF

HKD

AUD

SNG

30 June 2015 - Group

Trade receivables

310

276

1,366

Trade payables

544

357

552

116

866

1,439

Forward foreign exchange contracts
- buy foreign currency

64,692

847

951

Foreign currency options
- buy foreign currency

56,745

30 June 2014 - Group

Trade receivables

236

309

875

Trade payables

248

302

351

955

Forward foreign exchange contracts
- buy foreign currency

44,593

1,492

2,110

187

691

Foreign currency options
- buy foreign currency

56,434

1,181

Group Sensitivity

Based on the financial instruments held at 30 June 2015, had the Australian dollar weakened/strengthened by 5% against other foreign currencies

at that date, with all other variables held constant, it is estimated that equity would have been $3,027,580 higher / $2,964,486 lower (2014:

$2,070,000 higher / $1,619,000 lower), arising from forward foreign exchange contracts and foreign currency options designated as cash flow

hedges. The Group’s exposure to unhedged amounts is not material.

(B) INTEREST RATE RISK

The Group’s main interest rate risk arises from long-term borrowings with variable interest rates, which expose the Group to cash flow interest rate

risk. The Group’s fixed rate borrowings and receivables are carried at amortised cost. They are therefore not subject to interest rate risk as defined

in AASB 7, since neither the carrying amount nor the future cash flows will fluctuate because of a change in market interest rates.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Under these swaps the Group agrees with

relevant counterparties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest

amounts calculated by reference to the agreed notional principal amounts.
At 30 June 2015 $60,406,000 of the Group’s debt is at fixed rates. This is comprised of $30,000,000 of fixed rate bonds, $30,000,000 of

floating-to-fixed interest rate swaps and $406,000 of other fixed rate borrowings. The remainder of the Group’s debt is at variable rates.
At 30 June 2015 the Group holds two separate $15,000,000 floating-to-fixed interest rate swaps for a combined value of $30,000,000. The swaps

mature in May 2020. The contracts restrict the Group’s interest rate exposure to 4.13% (excluding the Group’s credit margin) for $30,000,000 of

the Group’s variable rate debt over this period. Both contracts are settled on a quarterly basis and compare with the 90 day Bank Bill Swap

Reference Rate (BBSW).

NOTES TO AND FORMING PART OF THE

CONSOLIDATED FINANCIAL STATEMENTS CONTINUED