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5. Financial risk management

5.1 Market risk

5.1 Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group income statement or the value of its assets and liabilities. The objective of market risk management is to manage and control market risk exposures. The Group enters into derivative financial instruments and also incurs financial liabilities or holds financial assets in order to manage market risk. Where possible, the Group seeks to apply hedge accounting in order to manage volatility in the income statement. It is the Group policy and practice not to enter into derivative transactions for speculative purposes.

5.1.1 Foreign exchange risk

The Group operates across the world and is exposed to movements in foreign currencies affecting its net income and financial position, as expressed in euro. The Group actively monitors its currency exposures, and when appropriate, enters into transactions with the aim of preserving the value of existing assets and liabilities, as well as anticipated transactions. The Group uses forward contracts, foreign exchange options and cross-currency swaps to hedge certain committed and anticipated foreign exchange flows and financing transactions.

The instruments purchased to hedge transactional exposure are pri- marily denominated in U.S. Dollar, British Pound, Japanese Yen and Swiss Franc, the currencies where the Group has its most important exposures. The Group’s financial risk management policy is to hedge for the impact from the translation of foreign currency assets and liabilities into the functional currency of the relevant group subsidiaries, as well as the impact of currency fluctuations on the Group’s anticipated net foreign currency cash flows for a period of minimum 6 and maximum 26 months.

The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.

The effect of translational exposure arising from the consolidation of the foreign currency denominated financial statements of the Group foreign subsidiaries as well as from assimilated net foreign investment positions and net investment hedges is shown as a cumulative translation adjustment in the Group consolidated statement of changes in equity.

5.1.2 Effect of currency fluctuations

At 31 December, 2020, if the euro had strengthened or weak- ened by 10% against the following currencies with all other vari- ables being held constant, the impact on equity and post-tax profit for the year, based on the outstanding currency balances and hedge instruments at that date, would have been as follows:

At December 31, 2020

Change in rate.

Impact on equity:

Impact on income statement:

€ million

Strengthening/ weakening (-) EUR

Loss (-)/gain

Loss (-)/gain

USD

+10%

135

39

-10%

-165

-48

GBP

+10%

-11

0

-10%

13

-1

CHF

+10%

-57

1

-10%

69

-2

JPY

+10%

10

1

-10%

-13

-1

At December 31, 2019

Change in rate.

Impact on equity:

Impact on income statement:

€ million

Strengthening/ weakening (-) EUR

Loss (-)/gain

Loss (-)/gain

USD

+10%

-75

-15

-10%

172

18

GBP

+10%

-45

1

-10%

56

-1

CHF

+10%

-63

0

-10%

77

0

JPY

+10%

15

3

-10%

-18

-4

5.1.3 Interest rate risk

Changes in interest rates may cause variations in interest income and expenses resulting from interest-bearing assets and liabilities. In addition, they can affect the market value of certain financial assets, liabilities and instruments as described in the following section on market risk of financial assets. The interest rates on the Group’s major debt instruments are both fixed and floating, as described in Note 29 and Note 30 . The Group uses interest rate derivatives to manage its interest rate risk, as described in Note 39 .

The Group designates derivative financial instruments (interest rate swaps) as hedging instruments, under fair value hedges, to fixed rate financial assets and liabilities. Both the derivative financial instrument and the hedged item are accounted for at fair value through profit or loss.

In 2020, changes in fair value resulting from interest rate derivatives designated to the floating rate liabilities of the Group have been accounted for through equity under IFRS 9.

5.1.4 Effect of interest rate fluctuations

A 100 basis points increase in interest rates at statement of finan- cial position date would have increased equity by € 10 million (2019: € 0 million); a 100 basis points decrease in interest rates would have decreased equity by € 11 million (2019: € 0 million).

A 100 basis points increase or decrease in interest rates at statement of financial position date would have no impact on profit and loss (2019: € 0 million).

All interest rate hedges are either designated as cash flow hedges or fair value hedges under IFRS9 and therefore, except for minimal hedge inefficiency, the result of a change in the interest rate curve is accounted for through equity, respectively offset by the revaluation through P&L of the hedged item.

These concern all pre-tax calculations.

5.1.5 Other market price risk

Changes in the market value of certain financial assets and derivative financial instruments can affect the income or the financial position of the Group. Financial long-term assets, if any, are held for contractual purposes, and marketable securities, if any, are mainly held for regulatory purposes. The risk of loss in value is managed by reviews prior to investing and continuous monitoring of the performance of investments and changes in their risk profile.

Investments in equities, bonds, debentures and other fixed income instruments are entered into on the basis of guidelines with regard to liquidity and credit rating.

Amounts subject to market price risk are rather immaterial and therefore the impact on equity or the income statement of a rea- sonable change of this market price risk is assumed to be negligible.

Similar to 2019, during 2020 the Group traded on treasury shares, which were accounted for through equity.