FINANCIAL Risk Management
FINANCIAL RISK FACTORS
The company has a number of investments in foreign subsidiaries,
The Group’s activities expose it to a variety of financial risks,
whose net assets are exposed to currency translation risk.
including market risk (this includes currency risk, fair value interest rate risk and price risk) as well as credit risk, liquidity risk and
Operational cash flow risk exists when loans are raised in
cash flow interest rate risk. The Group’s overall risk management
1 currency and repaid using cash generated in a different
programme focuses on the unpredictability of financial markets
currency. This risk is mitigated by the use of cross-currency
and seeks to minimise potential adverse effects on the financial
swaps where appropriate.
performance of the Group. The Group uses derivative financial instruments such as forward exchange contracts and cross-
currency swaps to hedge certain exposures.
The Group is only exposed to price risk to a very limited extent, through investments classified as available-for-sale. The Group
Risk management is carried out by a central treasury
is not exposed to commodity price risk.
department in close co-operation with operational units, using guidance provided by the Audit & Risk Committee of the Board
of Directors. A significant part of administration of foreign
The Group has no significant concentrations of credit risk
exchange risk management is outsourced. Group treasury
except as disclosed in note 12. The Group has policies in place
identifies, evaluates and hedges financial risks. The Audit &
to ensure that sales of products and services are made to
Risk Committee of the Board provides principles for overall risk
customers with an appropriate credit history. Trade receivables
management, as well as policies covering specific areas, such
comprise a wide customer base. Ongoing credit evaluations on
as foreign exchange risk, interest rate risk, credit risk, use of
the financial condition of customers are performed and where
derivative financial instruments and investing excess liquidity.
appropriate credit guarantee insurance cover is purchased.
Cash is placed with substantial financial institutions; derivatives
Foreign currency risk
are placed with high quality financial institutions.
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily
in respect of the following currencies:
Prudent liquidity risk management implies maintaining sufficient
United States Dollar
cash resources and ensuring the availability of funding through
an adequate amount of credit facilities. Due to the dynamic
nature of the underlying business, Group treasury aims at
maintaining flexibility in funding by negotiating committed credit
lines for the Group.
Foreign exchange risk arises from future transactions, recognised assets and liabilities and net investments in foreign
The Group manages liquidity risk through forecasting and
operations which are denominated in a currency which is not
monitoring cash flow requirements on a daily basis.
the Group’s functional currency. CASH FLOW AND FAIR VALUE INTEREST RATE RISK It is the policy of the Group for its South African operations to
It is the policy of the Group to limit its exposure to interest rate
hedge 100% of its purchases in foreign currencies using forward
movements and, where appropriate, enter into arrangements to
exchange contracts, except where the foreign purchases will
mitigate these risks.
form a significant part of goods that will eventually be exported. These imports, as well as the related exports, are hedged to
The Group’s interest rate risk arises from its interest-bearing
ensure that the export rates obtained will on average exceed
borrowings and its investment in preference shares, as well as
the import rates paid. Foreign operations do not make use of
the preference shares issued in terms of the BEE transaction
forward exchange contracts. The average length of forward
during the 2005 financial year. Financial instruments with
exchange contracts during the year was 2,4 months.
floating rates are subject to cash flow interest rate risk; financial instruments with fixed rates are subject to fair value interest rate risk. The majority of the Group’s borrowings are subject to floating interest rates.
Aspen Annual Report 2006