NOTES TO THE FINANCIAL STATEMENTS Cont’d 29. Financial instruments cont’d 29.6 Market risk cont’d 29.6.3 Other price risk Other price risk arises from price fluctuation risk mainly on aluminium related products. The Group is exposed to commodity price risk due to fluctuations in aluminium prices. The Group’s aluminium products are generally priced with reference to the London Metal Exchange (“LME”) aluminium rates. The Group has entered into commodity swaps and options to manage its exposure to movements in LME aluminium rates (see Note 29.7.2). Risk management objectives, policies and processes for managing the risk The Group mitigates its risk to the price volatility through establishing fixed price level that the Group considers acceptable and where deemed prudent, entering into commodity fixed price contracts. Commodity price risk sensitivity analysis A 10% (2021: 10%) increase in LME aluminium rates at the end of the reporting period would have decreased equity and post-tax profit or loss by the amounts shown below. This analysis assumes that all other variables remained constant. Equity Profit or loss Group Company 2022 2021 2022 2021 RM’000 RM’000 RM’000 RM’000 10% increase in LME aluminium rates 2,560 69,044 392 7,942 A 10% (2021: 10%) decrease in LME aluminium rates would have had equal but opposite effect to the amounts shown above, on the basis that all other variables remained constant. 29.7 Hedging activities 29.7.1 Currency risk – Transactions in foreign currency The Group is exposed to transactional foreign currency risk to the extent that there is a mismatch between the currency in which sales are denominated and the respective functional currencies of the Group. The functional currencies of Group entities are primarily the Malaysian Ringgit (“MYR”). The currency in which these sales transactions are primarily denominated is U.S. Dollars (“USD”). The Group’s risk management policy is to hedge up to 30% of its estimated foreign currency exposure in respect of forecast sales collection over the following 12 to 120 months at any point in time. The Group purchases forward foreign exchange contracts and borrows in USD to hedge foreign sales transactions. The Group designates the forward foreign exchange contracts and foreign currency loans and borrowings in their entirety to hedge its currency risk and applies a hedge ratio of 1:1. Some of these contracts have a maturity of more than 5 years from the reporting date while the term of the foreign currency loans and borrowings ranges from 4 to 5 years. The Group determines the critical terms of the forward exchange contracts and foreign currency loans and borrowings to align with the hedged items. The Group and the Company also entered into cross currency swaps to swap their RM denominated loan to USD. The swap was performed to manage the Group’s exposure to USD and RM within the Group’s policy. PRESS METAL ALUMINIUM HOLDINGS BERHAD 297
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