Financial statements
Notes to the financial statements
19 Derivative financial instruments
| Group 2007 £m |
Group 2006 £m |
Company 2007 £m |
Company 2006 £m |
|
|---|---|---|---|---|
| Current assets | ||||
| Forward foreign exchange contracts | 1 | 4 | 1 | 4 |
| Currency swaps | 8 | – | 8 | – |
| Interest rate swaps | 12 | 15 | 12 | 15 |
| 21 | 19 | 21 | 19 | |
| Current liabilities | ||||
| Forward foreign exchange contracts | (1) | (12) | (2) | (12) |
| Currency swaps | (10) | (3) | (10) | (3) |
| Interest rate swaps | (22) | (57) | (20) | (49) |
| Derivative element of Convertible Bonds | (156) | (96) | (156) | (96) |
| (189) | (168) | (188) | (160) |
Forward foreign exchange contracts and currency swaps
The Group uses forward exchange contracts and currency swaps to minimise the effect of fluctuations in the value of the investment portfolio from movement in exchange rates. Foreign currency interest-bearing loans and borrowings are also used for this purpose.
The contracts entered into by the Group are principally denominated in the currencies of the geographic areas in which the Group operates. The fair value of these contracts is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market rates at the balance sheet date. No contracts are designated as hedging instruments and consequently all changes in fair value are taken to the income statement.
At the balance sheet date, the notional amount of outstanding forward foreign exchange contracts is as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Currency swaps | 1,455 | 1,392 |
| Forward foreign currency contracts | 174 | 35 |
| 1,629 | 1,427 |
Interest rate swaps
The Group uses interest rate swaps to manage its exposure to interest rate movements on its interest-bearing loans and borrowings. The fair value of these contracts is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market rates at the balance sheet date. No contracts are designated as hedging instruments and consequently all changes in fair value are taken to the income statement.
At the balance sheet date, the notional amount of outstanding interest rate swaps is as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Fixed rate to variable rate | 10 | 340 |
| Fixed rate to fixed rate | – | 70 |
| Variable rate to fixed rate | 687 | 1,020 |
| Variable rate to variable rate | 200 | 170 |
| 897 | 1,600 |
The Group does not trade in derivatives. In general, derivatives held hedge specific exposures and have maturities designed to match the exposures they are hedging. It is the intention to hold both the financial instruments giving rise to the exposure and the derivative hedging them until maturity and therefore no net gain or loss is expected to be realised.
The derivatives are held at fair value which represents the replacement cost of the instruments at the balance sheet date. Movements in the fair value of derivatives are included in the income statement.