Lenovo Exposure to Exchange Rate RiskMost of Lenovo’s exchange rate risks arise primarilywith respect to United States dollar, Chinese Yuan (CNY), and European Dollar(EUR). By going through the annual report we understand that Lenovo’s foreigncurrency risk arises from future transactions, recognized assets andliabilities and its net investment in foreign operations denominated in acurrency that is not the group companies’ functional currency. The company’s annualreport shows individual entities are measured (functional currency) using thecurrency of the primary economic environment in which the entity operates. USD,is Lenovo Group’s functional and presentation currency.
Lenovo’s financial risk management program establishedas part of its ERM is responsible for managing Lenovo Group’s exposure toexchange rate risk. Lenovo uses derivative financial instruments to hedge currencyrisk exposures. We see that the company’s forward foreign exchange contractsare either used: a) to hedge a percentage of future transactions (cash flowhedges) or b) as fair value hedges for identified assets and liabilities. Figure 4.8 details the company’sexposure at the balance sheet date to currency risk arising from recognizedassets or liabilities denominated in a currency other than the functionalcurrency of the entity to which they relate, except for the currency riskbetween United States dollar and Hong Kong dollar given the two currencies areunder the linked exchange rate system.Annual report highlights that the company has adopteda consistent hedging policy for business transactions to reduce the risk ofcurrency fluctuation arising from daily operations.
At March, 2017, the companyhad commitments in the estimate of outstanding forward foreign exchangecontracts amounting to US$8,216 million which in 2016 was US $6,872 million. Lenovo’sforward foreign exchange contracts are either used to hedge a percentage offuture transactions which are highly probable, or used as fair value hedges foridentified assets and liabilities. For presentation purposes, the amounts ofthe exposure are shown in United States dollar, translated using the spot rateat the balance sheet date. Differences resulting from the translation of thefinancial statements of foreign operations into the Lenovo’s presentationcurrency are excluded.