2 www.ahold.com/reports2008
Notes to the consolidated financial statements
29 Financial risk management and financial instruments continued
Financial statements
AHOLD ANNUAL REPORT 2008 87
In accordance with treasury policy, Ahold uses derivative instruments solely for the purpose of hedging exposures which corresponds
to managing the interest rate and currency risks arising from the Company's operations and its sources of finance. Ahold does not
enter into derivative financial instruments for speculative purposes. The transaction of derivative instruments is restricted to treasury
personnel only and Ahold's internal control and internal audit departments review the treasury internal control environment regularly.
Relationships with the credit rating agencies and monitoring of key credit ratios are also managed by the treasury department.
Ahold's primary market risk exposures relate to foreign currency exchange rate and interest rate. In order to manage the risk arising
from these exposures, various financial instruments may be utilized.
Currency risk
Ahold operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect
to the U.S. dollar. Since Ahold's subsidiaries primarily purchase and sell in local currencies, the Company's exposure to exchange
rate movements in commercial operations is naturally limited. The Company is subject to foreign currency exchange risks due to
exchange rate movements in connection with the translation of income and assets and liabilities of its foreign subsidiaries into euros
for inclusion in its consolidated financial statements. To protect the value of future foreign currency cash flows, including lease
payments, dividends and firm purchase commitments, and the value of assets and liabilities denominated in foreign currency,
Ahold seeks to mitigate its foreign currency exchange exposure by borrowing in local currency and entering into various financial
instruments, including forward contracts and currency swaps. It is Ahold's policy to cover foreign exchange transaction exposure in
relation to existing assets, liabilities and firm commitments. Translation risk related to Ahold's foreign subsidiaries, joint ventures
and associates is not actively hedged.
Foreign currency sensitivity analysis
Approximately 65 percent of Ahold's net sales is generated by subsidiaries whose activities are conducted in a currency other than
the euro, mainly in the U.S. dollar. Assuming the euro had strengthened (weakened) by 10 percent against the U.S. dollar in 2008,
with all other variables held constant, the hypothetical result on income before income taxes would be a decrease (increase) of
EUR 38 million (2007: EUR 31 million).
Interest rate risk
Ahold's interest rate risk arises primarily from its debt. To manage interest rate risk, Ahold has an interest rate management policy
aimed at reducing volatility in its interest expense and maintaining a target percentage of its debt in fixed rate instruments. Ahold's
financial position is largely fixed by long-term debt issues and the use of derivative financial instruments such as interest rate swaps
and cross-currency interest rate swaps. As of December 28, 2008, after taking into account the effect of interest rate swaps and
cross-currency swaps, approximately 96 percent of Ahold's long-term borrowings are at a fixed rate of interest.
Interest rate sensitivity analysis
The total interest expense recognized in the 2008 consolidated income statement related to variable rate of long-term debt, net
of swaps, amounts to EUR 28 million (2007: EUR 56 million). The Company estimates that with a reasonably possible increase
(decrease) of euro and U.S. dollar market interest rates of 100 basis points with all other variables (including foreign exchange
rates) held constant, this would result in a hypothetical effect on income before income taxes of a loss (gain) of EUR 4 million
(2007: EUR 9 million). In addition, hypothetical results relating to fair value movements of derivative hedges that do not qualify
for hedge accounting would have been a loss of EUR 17 million or a gain of EUR 18 million, respectively (2007: a loss of
EUR 17 million or a gain of EUR 19 million, respectively).
The total interest income recognized in the 2008 consolidated income statement related to variable rate money market fund
investments and deposits amounts to EUR 95 million (2007: EUR 122 million). The Company estimates that with a reasonably
possible increase (decrease) of euro and U.S. dollar market interest rates of 100 basis points with all other variables (including
foreign exchange rates) held constant, this would result in a hypothetical effect on income before income taxes of a gain (loss) of
EUR 25 million (2007: EUR 27 million).
The above sensitivity analyses are for illustrative purposes only, as in practice market rates rarely change in isolation of other factors
that also affect Ahold's financial position and results.
