NOTES TO THE FINANCIAL STATEMENTS Cont’d 29. Financial instruments cont’d 29.7 Hedging activities cont’d 29.7.1 Currency risk – Transactions in foreign currency cont’d The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency, amount and timing of their respective cash flows. The Group assesses whether the derivatives and foreign currency loans and borrowings designated in each hedging relationship are expected to be and have been effective in offsetting changes in cash flows of the hedged item. In these hedge relationships, the main sources of ineffectiveness are: • the effect of the counterparty and the Group’s own credit risk on the fair value of the forward foreign exchange contracts, which is not reflected in the change in the fair value of the hedged cash flows attributable to the change in exchange rates; and • changes in the timing of the hedged transactions. 29.7.2 Commodity price risk 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 LME aluminium rates. The Group adopts a policy of ensuring that up to 65% of its commodity price risk exposure is at a fixed rate. This is achieved by entering into commodity swaps and options as hedges of the variability in cash flows attributable to movements in commodity prices. The Group adjusts its hedge ratio for each commodity contract entered to minimise the potential ineffectiveness arising from such contracts. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference commodity prices, tenors, maturities and the notional or par amounts. The Group assesses whether the derivatives designated in each hedging relationship are expected to be and have been effective in offsetting changes in cash flows of the hedged item. In these hedge relationships, the main sources of ineffectiveness are: • the differences in grades of aluminium produced by the Group and those provided in derivative contracts by financial institutions for the Group to enter into; and • changes in the timing of the hedged transactions. ANNUAL REPORT 2022 298
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