Positioning for the Future | 191
Appendix
Notes to the Financial Statements
Year ended 31 December 2014
33 FINANCIAL RISK MANAGEMENT
(cont’d)
(b) Market risk
Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity
prices will have on the Group’s income or the value of its holdings of mnancial instruments. The objective
of market risk management is to manage and control market risk exposures within acceptable parameters,
while optimising the return on risk.
(i) Interest rate risk
The Group’s exposure to market risk for changes in interest rate environment relates mainly to its
investment in mnancial products and debt obligations.
The investments in mnancial products are short term in nature and they are not held for trading or
speculative purposes. The mnancial products comprise mxed deposits or short term commercial papers
which yield better returns than cash at bank.
The Group manages its interest rate exposure by maintaining a prudent mix of mxed and noating rate
borrowings. The Group actively reviews its debt portfolio, taking into account the investment holding
period and nature of its assets. This strategy allows it to capitalise on cheaper funding in a low interest
rate environment and achieve certain level of protection against rate hikes. The Group also uses hedging
instruments such as interest rate swaps to minimise its exposure to interest rate volatility. The Group
classimes these interest rate swaps as cash now hedges.
The fair value loss of interest rate swaps as at 31 December 2014 was $18.0 million (2013 (Restated)
$29.4 million) comprising derivative assets of $1.9 million (2013 (Restated) $0.9 million) and derivative
liabilities of $19.9 million (2013 (Restated) $30.3 million).
Sensitivity analysis
For other variable rate mnancial liabilities and interest rate derivative instruments used for hedging,
it is estimated that an increase of 100 basis point in interest rate at the reporting date would lead to
a reduction in the Group’s promt before tax (and revenue reserves) by approximately $40.7 million
(2013 (Restated) $47.8 million). A decrease in 100 basis point in interest rate would have an equal
but opposite effect. This analysis assumes that all other variables, in particular foreign currency rates,
remain constant, and has not taken into account the effects of qualifying borrowing costs allowed for
capitalisation, the associated tax effects and share of non-controlling interests.
(ii) Foreign currency risk
The Group operates internationally and is exposed to various currencies, mainly Chinese Renminbi,
Euro, Hong Kong Dollars, Japanese Yen, Malaysian Ringgit, Sterling Pounds and US Dollars.
The Group maintains a natural hedge, whenever possible, by borrowing in the currency of the country in
which its property or investment is located or by borrowing in currencies that match the future revenue
stream to be generated from its investments.
The Group uses forward foreign exchange contracts to hedge its foreign currency risk, where feasible.
It generally enters into forward foreign exchange contracts with maturities ranging between three months
and one year which are rolled over at market rates at maturity. The Group also enters into cross currency
swaps to hedge the foreign exchange risk of its loans denominated in a foreign currency.
The net fair value gain of the forward foreign exchange and cross currency swap contracts as at
31 December 2014 was $9.6 million (2013 (Restated) fair value loss of $29.5 million), comprising
derivative assets of $58.4 million (2013 (Restated) $9.9 million) and derivative liabilities of $48.8 million
(2013 (Restated) $39.4 million).
Foreign exchange exposures in transactional currencies other than functional currencies of the operating
entities are kept to an acceptable level.
