Notes to the accounts
26. Financial instruments
Currency derivatives
The Group operates in both the US and the UK and it is exposed to foreign exchange risk arising from various currency exposures. The Group enters into the forward purchase of foreign currencies, principally the US dollar, in order to limit the impact of movements in foreign exchange rates on its forecast foreign currency purchases.
The Group also enters into forward purchase contracts for commodities in order that values of assets should not be unnecessarily exposed to significant movements in the price of the underlying precious metal raw material.
| Fairvalues as at 2 February 2008 |
Fairvalues as at 3 February 2007 |
|||
|---|---|---|---|---|
| Assets $m |
Liabilities $m |
Assets $m |
Liabilities $m |
|
| Cash flow hedges: | ||||
| Forward foreign currency contracts | 1.9 | – | – | (0.8) |
| Forward commodity contracts | 9.6 | – | 8.3 | – |
| 11.5 | – | 8.3 | (0.8) | |
Foreign currency exchange contracts not designated as cash flow hedges are used to hedge currency flows through the Signet Group plc bank accounts to ensure the Group is not exposed to foreign currency exchange risk in its cash and borrowings. As at 2 February 2008 the fair value of outstanding cross currency swaps was a liability of $1.6 million (2007: asset of $0.2 million).
The fair values of all financial instruments shown above are based on market value equivalents at the balance sheet date and are held as assets and liabilities within other receivables and other payables, and all contracts have a maturity of less than one year.
Gains of $10.2 million (2007: loss of $1.5 million) have been transferred to inventories in respect of contracts that matured during the period. Changes in the fair value of non-hedging foreign currency financial instruments amounting to $1.3 million (2007: $0.2 million) have been credited to the income statement during the period. The ineffective portion of hedging instruments taken to the income statement was $1.0 million (2007: $nil).
Currency risk
The significant exchange rates applied during the year have been disclosed in note 6. The Group’s exposure to foreign currency risk based on notional amounts is detailed below together with an analysis of the effect of a 10% strengthening of the US dollar against the UK pound. This analysis assumes that all other variables, in particular interest rates, remain constant.
| Estimated fair value 2 February2008 $m |
10% strengthening in $ against £ (unfavourable)/ favourable $m |
Estimated fair value 3 February 2007 $m |
10% strengthening in $ against £ (unfavourable)/ favourable $m |
|
|---|---|---|---|---|
| Borrowings | (416.3) | – | (385.5) | – |
| Foreign currency receivable | 34.7 | (3.5) | 40.3 | (4.0) |
| Foreign currency payables | (149.3) | 14.9 | (153.4) | 15.3 |
| Foreign exchange contracts | 0.3 | 8.0 | (0.6) | (6.1) |
| Commodity hedging contracts | 9.6 | – | 8.1 | – |
A 10% weakening of the US dollar would have had the equal but opposite effect, on the basis that all other variables remain constant.