Natural Hedging

* Natural hedging (internal instruments4): There are companies like Christian Salvesen, De La Rue, Johnson Matthey, Laird5, George Wimpey, Low & Bonar, and BPB that, though to different extents, they hedge translation exposure and mainly on overseas assets by matching the assets and/or overseas capital employed and the borrowings in the relevant currencies (natural hedge against overseas assets).

There are also companies like Mark and Spencer, and United Biscuits that mitigate this type of exposure through these means but the extent of which is not available.

* Breakdown of the exposure and coping with accordingly (position based hedging): There are companies that attempt to protect some positions of translation exposures and not to do so with some others. As far as the surveyed companies are concerned, RMC, TDG, and Amersham, do not protect the sterling value of profits earned in overseas subsidiaries from changes arising from exchange rate movements. RMC does not even attempt to protect the sterling value of the net worth of overseas subsidiaries from exchange rate movements. However, they do take measures to determine the appropriate level of borrowings in each currency which are used as a hedge against the currency translation exposures arising from their net investment overseas.

* Hedging with derivative and nonderivative instruments: There are some companies which hedge balance sheet translation exposures (normally, their net assets denominated in currencies other than sterling6) by employing both derivative and non-derivative financial instruments. Charter (forward and borrowings in functional currencies), Delta (swaps and currency borrowings), GUS (borrowing in US dollars and euros, as well as in sterling, and entering into forward foreign exchange contracts in these two currencies), Greencore (matching foreign currency assets with foreign currency borrowings, currency swaps or other hedges), Hilton (borrowing in foreign currencies to match at least 75% of the foreign currency assets and forward currency exchange contracts on translation of foreign currency net assets), Reckitt Benckiser (borrowings and other hedging methods, primarily currency swaps, in the currencies of the countries where most of the assets are located), Stagecoach (borrowings denominated in overseas functional currency or through the use of derivative financial instruments and through forward currency exchange contracts), TT electrone (by use of matched borrowings and forward currency contracts), the BOC Group ( borrowings in relevant currencies and markets and the use of currency swaps) fall into this category.

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