Market risk sensitivity analysis
This section on market risk sensitivity analysis forms part of the audited financial statements.
The group has used a sensitivity analysis technique that measures the estimated impacts on the income statement and on equity of either an instantaneous increase or decrease of 1% (100 basis points) in market interest rates or a 10% strengthening or weakening in sterling against all other currencies, from the rates applicable at 30 June 2009, for each class of financial instrument with all other variables remaining constant. The sensitivity analysis excludes the impact of market risks on net post employment benefit obligations and taxation. This analysis is for illustrative purposes only, as in practice interest and foreign exchange rates rarely change in isolation.
The sensitivity analysis is based on the following:
- Financial instruments are valued at the balance sheet date using discounted cash flow techniques.
- Changes in interest rates affect the interest income or expense of variable interest financial instruments.
- Changes in interest rates only affect interest income or expense in relation to financial instruments with fixed interest rates if these are recognised at their fair value.
- Changes in interest rates affect the fair value of derivative financial instruments designated as hedging instruments and all interest rate hedges are expected to be highly effective.
- Changes in the fair values of derivative financial instruments and other financial assets and liabilities are estimated by discounting the future cash flows to net present values using rates prevailing at the year end.
- All net investment and foreign currency cash flow hedges are expected to be highly effective.
The amounts generated from the sensitivity analysis are estimates of the impact of market risk assuming that specified changes occur. Actual results in the future may differ materially from these results due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the following table, which therefore should not be considered a projection of likely future events and losses.
As at 30 June 2009 and 30 June 2008, hypothetical changes in other risk variables would not significantly affect the fair value of financial instruments at those dates.
Sensitivity analysis table
| 1% decrease in interest rates £ million | 1% increase in interest rates £ million | 10% weakening in sterling £ million | 10% strengthening in sterling £ million |
|
|---|---|---|---|---|
| At 30 June 2009 | ||||
| Impact on income statement: gain/(loss) | 33 | (39) | (38) | 31 |
| Impact on equity: gain/(loss)(a) | 30 | (31) | (834) | 682 |
| At 30 June 2008 | ||||
| Impact on income statement: gain/(loss) | 24 | (24) | (31) | 25 |
| Impact on equity: gain/(loss)(a) | 24 | (24) | (727) | 595 |
(a) The group’s foreign currency debt is used as a hedge of net investments in foreign operations and as such the translation of foreign net investments would mostly offset the foreign currency gains or losses on financial instruments recognised directly in equity.
The above analysis considers the impact of all financial instruments including financial derivatives, cash and cash equivalents, borrowings and other financial assets and liabilities.