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30 Financial risk management and financial instruments continued
Ahold
Annual Report 2011
Groupata glance
Performance
Governance
Investors
Notes to the consolidated financial statements continued
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 its foreign subsidiaries' income, assets, and liabilities into euros for inclusion in its
consolidated financial statements. To protect the value of future foreign currency cash flows, including loan and interest payments, 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 purchase commitments. T ranslation risk related to Ahold's foreign subsidiaries, joint ventures, and associates is not
actively hedged, except for cash flows from dividends not denominated in euro that are hedged using net investment hedges.
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 (2010: 65 percent) - mainly in the U.S. dollar. Assuming the euro had strengthened (weakened) by 10 percent against the U.S. dollar
in 2011 compared to the actual 2011 rate, with all other variables held constant, the hypothetical result on income before income taxes
would be a decrease (increase) of €22 million (2010: €35 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 January 1, 2012, after taking into account the effect of interest rate swaps and cross-currency swaps,
approximately 95 percent of Ahold's long-term borrowings were at fixed rates of interest (2010: 96 percent).
Interest rate sensitivity analysis
The total interest expense recognized in the 2011 income statement related to the variable rates of long-term debt, net of swaps,
amounted to €8 million (2010: €9 million). The Company estimates that with a possible increase (decrease) of euro and U.S. dollar market
interest rates of 25 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 nil (2010: nil). In addition, a hypothetical result relating to fair value movements of
derivative hedges that do not qualify for hedge accounting would have been a loss of €5 million or a gain of €5 million, respectively (2010:
a loss of €4 million or a gain of €5 million, respectively). In performing this analysis, the effect was limited to a point where the absolute
value of the reference interest would not decrease below 0 percent.
The total interest income recognized in the 2011 income statement related to variable rate money market fund investments and deposits
amounted to €20 million (2010: €18 million). The Company estimates that with a possible increase (decrease) of euro and U.S. dollar
market interest rates of 25 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 €5 million (2010: a gain (loss) of €6 million). In performing this
analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0 percent.
The above sensitivity analyses are for illustrative purposes only as, in practice, market rates rarely change in isolation from other factors
that also affect Ahold's financial position and results.
Credit risk
Ahold has no significant concentrations of credit risk. Sales to retail customers are made in cash, checks, and debit cards, or via major
credit cards. Sales to franchisees are done on credit. Derivative counterparties and cash transactions are limited to high-credit-quality
financial institutions' products. Ahold invests in funds with a minimum rating of A- (Standard Poor's), and predominantly AAA. With
respect to credit risk, derivative contracts with counterparties are entered into primarily under the standard terms and conditions of the
International Swap and Derivatives Association. The counterparties have an externally validated investment grade credit rating. Ahold has
policies that limit the amount of counterparty credit exposure to any single financial institution or investment vehicle and continually
monitors these exposures. The maximum exposure to credit risk is represented by the carrying amounts of the financial assets on the
balance sheet (refer to the table on fair values of financial instruments below in this Note). The maximum net amount of a credit risk loss
that Ahold would incur if financial institutions that are parties to the derivative instruments completely failed to perform according to the
terms of the contracts is €290 million as of January 1, 2012 (January 2, 2011: €279 million).
