MARKET RISK
Market risk is the risk of adverse financial impact due to changes in the value or future cash flows of financial instruments from
fluctuations in foreign currency exchange rates, interest rates and equity prices. Refer to the Risk Management Overview section
above.
a. FOREIGN EXCHANGE RISK
i. Nature of the risk and how managed
Foreign exchange risk is the risk of loss arising from adverse exchange rate movements in unhedged foreign exchange exposures. The
Consolidated entity operates internationally and so is exposed to foreign exchange risk from various activities conducted in the normal
course of business. Foreign exchange exposure is a centrally managed risk, with hedging coordinated by the Group's Corporate Office.
Refer to the derivatives note for further details on the hedging arrangements used to manage foreign exchange risk.
The key foreign exchange risk exposures relate to the following:
investment of shareholders' funds - the investment of shareholders’ funds in assets denominated in currencies different to the
functional currency. Assets held to back insurance liabilities are held in the same currency as the related insurance liabilities,
mitigating any net foreign exchange exposure;
interest bearing liabilities - foreign currency denominated interest bearing liabilities are generally of a capital nature. Some are
designated as hedging instruments to manage the foreign exchange risk associated with investments in foreign operations; and
investment in foreign operations - net investment in foreign operations through the translation of the financial position and
performance of foreign operations that have a functional currency other than the Australian dollar with the key currencies being
New Zealand dollars, Indian rupees, Malaysian ringgit, Chinese renminbi, Vietnamese dong, Thai baht and Indonesian rupiah.
ii. Foreign exchange risk exposure
The financial impact from exposure to foreign exchange risk to the Group is primarily driven by:
translation of foreign currency transactions - relating mainly to investments, directly recognised in profit or loss;
translation of the financial performance of foreign operations - recognised directly in profit or loss; and
translation of the financial position of foreign operations - recognised directly in equity in the foreign currency translation reserve.
iii. Sensitivity
The following tables provide information regarding the exposure of the Consolidated entity to foreign exchange risk. The sensitivity
analysis provided in the following tables demonstrates the effect of a change in one key assumption while other assumptions remain
unchanged. In reality, there is a correlation between the assumptions and other factors. The sensitivities do not include
interdependencies among the currencies, but rather show isolated exchange rate movements. The sensitivity analysis does not take
into consideration that the assets and liabilities are actively managed and assumes no action by management in response to
movements in the factor. Additionally, the financial position may vary at the time that any actual market movement occurs.
The impact on the measurement of various financial instruments held at reporting date of an instantaneous 10% depreciation of the
Australian dollar at reporting date compared with selected currencies, on profit after tax and equity, net of related derivatives, is
provided in the table below. An appreciation of the Australian dollar would predominantly have the opposite impact.
CONSOLIDATED
2015
2014
$m
$m
Impact to
profit
Impact to
profit
Shareholders' funds including related derivatives
United States dollar
1
2
1
2
CONSOLIDATED
2015
2014
$m
$m
Impact
directly to
equity
Impact
directly to
equity
Net investments in foreign operations and related hedge arrangements
New Zealand dollar
87
74
Malaysian ringgit
15
16
Other currencies where considered significant
15
15
117
105
57
