Year ended 31 July 2006
11. Derivative financial instruments
| Current assets | 2006
£m | 2005
£m |
|---|---|---|
| Interest rate swaps | 10 | 2 |
| Currency swaps: at fair value through profit and loss | - | 1 |
| Derivative financial assets | 10 | 3 |
| Current liabilities | 2006
£m |
2005
£m |
|---|---|---|
| Interest rate swaps | (2) | (2) |
| Currency swaps: at fair value through profit and loss | (2) | (12) |
| Derivative financial liabilities | (4) | (14) |
Interest rate swaps
The Company uses interest rate swaps to manage its exposure to interest rate movements on its borrowings. The fair value of interest rate swaps is estimated on the basis of the market values of equivalent instruments at the balance sheet date.
The Company's bank borrowings generally attract variable interest rates based on 6 month LIBOR. Certain interest rate swaps are designated and effective as cash flow hedges and the valuation gains have been deferred in equity until realised.
| Hedge of interest rate cash flows | 2006
£m |
2005
£m |
|---|---|---|
| At 1 August | - | (1) |
| Valuation gains on effective hedges credited to equity | 9 | 1 |
| Valuation losses charged to profit and loss | (1) | - |
| At 31 July | 8 | - |
Outstanding interest rate swap contracts at 31 July 2006 comprised fixed interest payable on notional principal of US$650 million and €770 million (2005: US$575 million and €785 million) and fixed interest receivable on notional principal of US$350 million. The contracts expire between September 2006 and August 2009 (2005: August 2005 and August 2009) and the gains deferred in equity will reverse in the profit and loss account over that period. The fixed interest rates varied between 2.313% and 5.415% (2005: 2.0375% and 4.3275%).
Currency swaps
The Company uses currency swaps either to obtain the optimum return on its surplus funds or to hedge the spot exchange rate risk of its assets and liabilities, principally loans. The fair value of currency swaps has been estimated as the cost of closing out the contracts using market prices at the balance sheet date.
| At fair value through profit and loss | 2006
£m |
2005
£m |
|---|---|---|
| At 1 August | (11) | - |
| Valuation gains/(losses) charged to profit and loss | 5 | (11) |
| Cash settlements in the period | 4 | - |
| At 31 July | (2) | (11) |
At the balance sheet date the Company had entered into certain short-term currency swaps amounting to assets of US$627 million, €222 million and CHF 22 million (2005: assets of £287 million) and liabilities of £419 million and C$169 million (2005: liabilities of US$525 million).
