Interest rate risk
Interest rate risk depends on the movements in interest rates in the market which can cause changes in the fair value of the cash flows of financial assets and liabilities.
Interest rate risk mainly concerns long-term bond and note borrowings which are issued at a fixed rate thus exposing the Group to the risk of fair value changes on the loans themselves as interest rates move. Following risk management policies, the Parent Company and the subsidiaries have entered into various IRS contracts over the years in order to hedge the interest rate risk on their bond and note issues and on loan agreements.
Sensitivity analysis
A parallel shift of one percentage point in the 3 months Euribor curve would have the following effect on the floating rate assets and liabilities of the Group:
| (amounts in thousands of euro) | 31.12.2010 | 31.12.2009 | ||
|---|---|---|---|---|
| Percentage shifts | -1% | +1% | -1% | +1% |
| Change in Income Statement | (9,780) | 7,936 | 1,656 | (5,485) |
| Change in Shareholders’ Equity | (34,379) | 35,836 | (13,941) | 20,128 |
Derivative instruments
Derivative instruments are recognized at their fair value.
For accounting purposes hedging transactions are classified as:
- fair value hedges if they are subject to price changes in the market value of the underlying asset or liability;
- cash flow hedges if they are entered into to protect from the risk of changing cash flows from an existing asset and liability, or from a future transaction.
- hedges of net investments in foreign operations if they are entered into to protect from the exchange rate risk in the conversion of the equity of subsidiaries denominated in a currency other than the functional currency of the Group.
For derivative instruments classified as fair value hedges gains and losses resulting from both the determination of their market value and the adjustment to fair value of the element underlying the hedge are posted to the income statement.
For instruments classified as cash flow hedges (for example interest rate swaps) gains and losses from marking them to market are posted directly to shareholders’ equity for the part which “effectively” covers the risk they are intended to cover, while any “non-effective” part is posted to the income statement.
For instruments classified as hedges of net investments in foreign operations gains and losses obtained from marking them to market are posted directly to shareholders’ equity for the part which “effectively” hedges the risk they are intended to cover, while any “non-effective” part is posted to the income statement.
Derivatives used for hedging purposes, when the hedge accounting is entered, are accompanied by a hedging relationship which designates the individual instrument as entered into for the purposes of hedging and gives the parameters of effectiveness of the hedge in relation to the financial instrument being hedged.
The level of effectiveness of the hedge is evaluated at regular intervals and the effective part of the relationship is posted to shareholders’ equity while any non-effective part is charged to the income statement. More specifically, the hedge is considered to be effective when the change in fair value or in the financial flows of the instrument hedged is almost entirely compensated for by the change in the fair value or the financial flows of the hedging instrument and when the results achieved are in a range of between 80% and 125%.
At December 31 2010, the Group had the following derivatives contracts booked as hedges at their notional value:
(a) Interest hedges:
Hedging interest on the CIR International fixed to floating bond issue (€ 148 million) maturing in 2011;
Hedging interest on the Gruppo Editoriale L'Espresso fixed to floating bond issue (notional value € 50 million) ; Hedging Sogefi bank borrowings, notional value € 85 million maturing in 2011 (€ 5 million), in 2011 (€ 5 million), maturing in 2012 (€ 30 million) and in 2013 (€ 50 million);
Hedging Sorgenia group bank borrowings, notional value € 1,578.7 million; Hedging Kos group bank borrowings, notional value € 122.5 million;
(b) Foreign currency hedges: Forward sales of a total of USD 112 million hedging investments in hedge funds;
Forward sale of USD 7.2 million against EUR maturing in 2011;
Forward purchase of € 2.5 million agaisnt GBP maturing in 2011;
Forward sale of ARP 1.9 million against BRL maturing in 2010;
Forward purchase of 2.3 million against BRL maturing in 2011; Forward purchase of USD 1.9 million against ARP maturing IN 2011.
