105 / 135
HALF-YEAR REPORT 2016
Notes to the Consolidated Financial Statements
For the six months ended 30 June 2016
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32 Financial risk management and fair values
(continued)
(c) Interest rate risk
(continued)
(iii) Sensitivity analysis
The Group uses sensitivity analysis to measure the potential effect of changes in interest rates
on the Group’s profit or loss. As at 30 June 2016, it is estimated that a general increase or
decrease of 100 basis points in interest rates, with all other variables held constant, the Group’s
annualised profit before taxation would decrease or increase by HK$3,651 million (31 December
2015: the Group’s annual profit before taxation would decrease or increase by HK$2,968 million).
This sensitivity analysis is based on a static interest rate risk profile of the Group’s non-derivative
assets and liabilities and certain simplified assumptions. The analysis only measures the impact
of changes in the interest rates within one year, showing how annualised interest income would
have been affected by repricing of the Group’s non-derivative assets and liabilities within the
one-year period. The analysis is based on the following assumptions: (1) all assets and liabilities
that reprice or mature within three months and after three months but within one year reprice
or mature at the beginning of the respective periods; (2) there is a parallel shift in the yield
curve and in interest rates; and (3) there are no other changes to the portfolio, all positions will
be retained and rolled over upon maturity. The analysis does not take into account the effect
of risk management measures taken by management. Because of its hypothetical nature with
the assumptions adopted, actual changes in the Group’s profit before taxation resulting from
increases or decreases in interest rates may differ from the results of this sensitivity analysis.
(d) Currency risk
Currency risk arises from the changes in exchange rates on the Group’s foreign currency denominated
assets and liabilities. The Group measures its currency risk with foreign currency exposures, and
manages currency risk by entering into spot foreign exchange transactions, use of derivatives
(mainly foreign forwards and swaps), and matching its foreign currency denominated assets with
corresponding liabilities in the same currency.
The revenue from the Group’s Sino Iron Project will be denominated in US$, which is also the
functional currency for this entity. A substantial portion of its development and operating expenditure
are denominated in Australian Dollars. The Group entered into plain vanilla forward contracts to
manage the foreign currency risks.
The Group funded the Sino Iron Project and the acquisition of bulk cargo vessels by borrowing US$
loans to match the future cash outflows of these assets. The Group’s investments in the Sino Iron
Project and bulk cargo vessels (whose functional currency is in US$) have been designated as an
accounting hedge against other US$ loans.