DERIVATIVES TO HEDGE RISK

SIME DARBY BHD

GROUP ASSIGNMENT
PFS 3363 FINANCIAL DERIVATIVES

PREPARED FOR:

MADAM SURIA ABU BASAR

PREPARED BY:

MUHAMMAD FAEZ BIN RAMLEE (4181001181)

POOVIZLY D/O PUSHPANATHAN (4181001361)
SRI SARASWATHY D/O SANDRA RAJU (4181002751)
NAME 4 (STUD ID)
NAME 5 (STUD ID)

SUBMISSION DATE:

6th JULY 2020

Table of Content
1.0 Introduction…………………………………………………………………………….
2.0 Risks faced by Sime Darby Bhd……………………………………………………….
2.1 Foreign exchange risk………………………………………………………………
2.2 Interest rate risk…………………………………………………………………….
2.3 Credit risk……………………………………………………………………………
2.4 Liquidity and cash flow risk…………………………………………………………
3.0 Derivatives Instruments Used by Sime Darby Bhd……………………………………
3.1 Forward foreign exchange contracts……………………………………………….
3.2 Interest rate swap contracts………………………………………………………...
3.3 Cross currency swap contract……………………………………………………...
3.4 Commodity futures contracts……………………………………………………...
4.0 Derivatives Instrument to Hedge Risk………………………………………………...
4.1 Forward foreign exchange contracts……………………………………………….
4.2 Interest rate swap contract………………………………………………………….
4.3 Cross currency swap contract……………………………………………………….
5.0 Recommendation……………………………………………………………………….
6.0 Conclusion……………………………………………………………………………...
7.0 References………………………………………………………………………………
1.0 Introduction
Sime Darby Berhad is a partner of choice for some of the world’s best brands in the Industrial
and Motors sectors. With operations in 18 countries and territories across Asia Pacific, they
continue to grow, delivering sustainable value to their stakeholders through operational
excellence, high performance standards and good corporate governance.
Sime Darby Vision
To be the leading Motors and Industrial player in Asia Pacific
Sime Darby Mission
● Develop a winning portfolio of sustainable businesses.
● Deliver superior financial returns through operational excellence and high
performance standards.
● Subscribe to good corporate governance and high ethical values.
● Provide an environment for their people to realise their full potential.
Sime Darby Core Values
1. Integrity
Uphold high levels of personal and professional values in all their business interactions and
decisions.
2. Respect & Responsibility
Respect for the individuals they interact with and the environment that they operate in
(internally and externally) and committing to being responsible in all their actions.
3. Excellence
Stretch the horizons of growth for themselves and they business through their unwavering
ambition to achieve outstanding personal and business results.
4. Enterprise
Seek and seize opportunities with speed and agility, challenging set boundaries.

Board of Directors
 Name Position
Tan Sri Samsudin Osman - Acting Chairman

- Non-Independent Non-Executive Director

Datuk Wan Selamah Wan Sulaiman Independent Non-Executive Director
Dato’ Sri Abdul Hamidy Abdul Hafiz Independent Non-Executive Director
Dato’ Ahmad Pardas Senin Independent Non-Executive Director
Thayaparan Sangarapillai Independent Non-Executive Director
Dato' Lawrence Lee Cheow Hock Non-Independent Non-Executive Director
Moy Pui Yee Independent Non-Executive Director
Mohamad Idros Mosin Non-Independent Non-Executive Director
Dato' Dr Nirmala Menon Independent Non-Executive Director
Dato' Jeffri Salim Davidson Group Chief Executive Officer

2.0 Risks faced by Sime Darby Bhd

Each company in Malaysia will be exposed to different riks every year. The Sime Darby Bhd
Group’s operations expose it to a variety of financial risks, including foreign exchange risk,
interest rate risk, credit risk and liquidity and cash flow risk.
2.1 Foreign exchange risk
The foreign exchange risk of the Sime Darby Bhd Group applies to adverse exchange rate
fluctuations on foreign currency positions arising from financial assets or liabilities
denominated in foreign currencies not in the respective subsidiaries' functional currency and
net assets in overseas subsidiaries where the functional currencies are not in Ringgit
Malaysia.
They operate internationally and are exposed to foreign exchange risk arising from different
currency exposures, primarily with relation to United States Dollar, Chinese Renminbi,
European Union Euro and Australian Dollar. Foreign exchange risk derives from future
commercial transactions, known assets and liabilities, and investments in foreign operations.
 Details of the Group’s foreign currency exposure and the currency profile of monetary
financial assets and financial liabilities are as follows:
Denominated in currencies other than functional
currencies

Denominated
Group in functional
currencies
Total
United European
States
Chinese Union
Dollar
Renminbi Euro Others
2019
Financial - - - - 87000000 87000000
assets at
FVTPL
Receivable 292000000 15100000 19000000 36000000 3750000000 4248000000
s (net) 0
Bank 71000000 21000000 - 15000000 1616000000 1723000000
balances,
deposits
and cash
Borrowings (531000000) - - - (2044000000 (2575000000)
)
Payables (396000000) - (212000000 (40000000) (3806000000 (4454000000)
) )
(564000000) 17200000 (193000000 11000000 (397000000) (971000000)
0 )
The company has no financial assets or liabilities denominated in foreign currency as of 30
June 2019 and 30 June 2018 other than a nominal amount of cash held in US Dollars as at 30
June 2018.
Last but not least, foreign exchange risk which affects the statements of profit or loss occurs
when monetary assets/liabilities that are not denominated in the functional currency of the
respective subsidiaries are not hedged.
i. Borrowings
RM58 million was been hedged with derivatives and RM462 million is designated as hedge
instruments for receivables and anticipated sales, of the RM531 million borrowings
denominated in US dollars. The remaining RM11 million is expected to be paid in the
financial year ending 30 June 2020.

ii. Bank balances

Bank balances denominated in non-functional currencies are not hedged. However, they are
generally held for a short period and would either be converted to the functional currency or
used to hedge or settle payables in the same currency. As such, foreign exchange risk for
unhedged bank balances is generally limited.
iii. Receivables and payables
Receivables and payables in non-functional currencies are generally hedged using
derivatives or borrowings or exposed for a short period (pending settlement or hedging), with
limited foreign exchange risk. The US Dollar and Euro payables have largely been hedged
with derivatives. However, certain material balances in non-functional currencies have not
been hedged due to the uncertainty in the timing of the receipt/settlement.
The following table illustrates the effect of changes in exchange rate on the translation of the
material unhedged financial assets or liabilities against the functional currency at 30 June
based on a 5% movement in rates, which is a reasonable assumption based on recent
volatility of the exchange rates.
Foreign Impact on
currency profit before
Functional Foreign Amount in
scenario tax
currency currency RM
Group
2019
Receivables HKD RMB 172000000 (5%) (9000000)
and bank
 balances

2018
Receivables HKD RMB 216000000 (5%) (11000000)
and bank
balances

2.2 Interest rate risk

The Sime Darby Group’s interest rate risk arises from its borrowings and deposits
placed with financial institutions. Deposits with financial institutions are mainly funds held
for liquidity purposes and temporary surpluses, hence are usually placed in short-term
interest-bearing instruments. After that, changes in market interest rates will be re-priced
immediately into these floating rate instruments. As at 30 June 2019, the Sime Darby Group’s
percentage of fixed rate borrowings to the total borrowings was 1.3%.
Furthermore, most of the borrowings on floating rates that have not been swapped are
short term borrowings mainly for working capital purposes and trade lines of the Industrial
and Motors divisions.
Lastly, as at 30 June 2019, the Sime Darby Group’s floating rate borrowings of the
continuing operations not swapped to fixed stood at RM2,542 million.
2.3 Credit risk
Credit risk is the risk of a financial loss to the Sime Darby Group due to counterparties
defaulting on their commitments. Next, credit risk arises on sales made on credit terms,
derivatives with positive fair value, deposits with banks, guarantees and performance
guarantees given on behalf of others and risk sharing arrangements. After that, they seek to
control credit risk by dealing with counterparties with appropriate credit histories and deposit
with banks and financial institutions with good credit ratings. Credit risk is also managed
through credit assessment and approval, credit limit and monitoring procedures. Where
appropriate, guarantees or securities are obtained to limit credit risk.
2.4 Liquidity and cash flow risk
Liquidity risk refers to the risk that the Sime Darby Group or their Company will encounter
difficulty in meeting financial obligations when it falls due. Next, they maintain a prudent
borrowing policy which is aimed towards maintaining sufficient cash for all cash flow
requirements, managing debt and investment portfolio within the relevant time buckets to
maturity, obtaining a diverse range of funding sources, and keeping an adequate amount of
credit facilities to provide ample liquidity cushion.
As at 30 June 2019, the Sime Darby Group’s total cash and cash equivalents was
RM1,629 million which included cash in hand and deposits held at call with banks, net of
bank overdrafts. As at 30 June 2019, their company had total cash and cash equivalents of
RM150 million.
They believe that its contractual obligations, including those disclosed in commitments and
contingencies in respectively, can be met from existing cash and investments, operating cash
flows, credit lines available and other financing that the Group reasonably expects to be able
to secure should the need arise.

3.0 Derivatives Instruments Used by Sime Darby Bhd

The following shows the derivatives instruments used by Sime Darby Bhd including forward
foreign exchange contracts, interest rate swap contracts, cross currency swap contract, and
commodity futures contracts.
3.1 Forward foreign exchange contracts
Forward foreign exchange contracts were entered into by subsidiaries in currencies other than
their functional currency in order to manage exposure to fluctuations in foreign currency
exchange rates on specific transactions.
The forward foreign currency contracts are stated at fair value, using the prevailing market
rates. All changes in fair value of the forward foreign currency contracts are recognised in the
other comprehensive income statement unless it does not meet the conditions for the
application of hedge accounting, in which case, the changes to the fair value of the
derivatives are taken to profit or loss.
3.2 Interest rate swap contracts
The Sime Darby Bhd Group has entered into interest rate swap contracts to convert floating
rate liabilities to fixed rate liabilities to reduce the Group’s exposure from adverse
fluctuations in interest rates on underlying debt instruments. The differences between the
rates calculated by reference to the agreed notional principal amounts were exchanged at
periodic intervals. All changes in fair value during the financial year are recognised in the
other comprehensive income statement unless it does not meet the conditions for the
application of hedge accounting, in which case, the changes to the fair value of the
derivatives are taken to profit or loss.
They had previously entered into interest rate swap contracts for certain long-term
borrowings to reduce the Group’s exposure to volatility in interest rates. The interest rate
swap contracts, all plain vanilla, have expired during the financial year.
Effective Period Range of Notional amount in original currency
weighted average Original 2019 2018
rate per annum currency
12 December 2012 1.822% to USD - 33,000,000.00
to 12 December 1.885%
2018
30 June 2015 to 17 3.938% RM - 42,000,000.00
December 2018

The notional amount, fair value and maturity periods of the interest rate swap contracts are as
shown:
Notional amount Fair value assets
2019 2018 2019 2018
Maturity period:

- due no later
than one year
- 175,000,000.00 - 1,000,000.00
- 175,000,000.00 - 1,000,000.00

3.3 Cross currency swap contract

The Sime Darby Bhd Group has entered into a cross currency swap contract to exchange the
principal payments of a foreign currency which is United State dollar (USD) denominated
loan into another currency which is Australian dollar (AUD) to reduce the Group’s exposure
from adverse fluctuations in the foreign currency exchange rate. All changes in fair value
during the financial year are recognised in the other comprehensive income statement unless
it does not meet the conditions for the application of hedge accounting, in which case, the
changes to the fair value of the derivatives are taken to profit or loss.

The contract has expired during the financial year ended 30 June 2019.
 Notional amount Fair value assets
2019 2018 2019 2018
Maturity period: - 178,000,000.00 - 43,000,000.00
- due no later
than one year
- 178,000,000.00 - 43,000,000.00

3.4 Commodity futures contracts

Commodity futures contracts were entered into by subsidiaries to manage exposure to

adverse movements in vegetable oil prices. These contracts were entered into and continue to
be held for the purpose of receipt or delivery of the physical commodity in accordance with
their expected purchase, sale and usage requirements.

4.0 Derivatives Instrument to Hedge Risk

A derivative instrument is a contract between two parties which gives the right and
sometimes the obligation to buy or sell an underlying asset and specifics conditions such as
the dates, price, quantity and value of underlying variables in which the payment has to be
made between the participants. While hedging refers to any technique designed to reduce or
eliminate risks of adverse movement in financial terms. The Sime Darby Group uses
derivative financial instruments such as interest rate swaps, cross currency swaps and forward
foreign exchange contracts to hedge their exposure to financial risk. They apply natural
hedging, to the extent possible, by matching foreign currency assets or income against
foreign currency liabilities or costs. Net foreign currency exposures and forecasted foreign
currency cash flows are hedged via forward foreign exchange contracts and currency swaps.

4.1 Forward foreign exchange contracts

Sime Darby Bhd is a company’s running the international business hence that involve in
exchange currency with other country. Foreign exchange risk arises from future commercial
transactions, recognized assets and liabilities and investment in foreign operation. Therefore,
to prevent volatility for currency exchange rate that will taking forward foreign exchange
contract to hedge from the foreign exchange risk. Forward foreign exchange contracts have
been entered by Sime Darby Bhd into with the following notional amounts and maturities.
Firstly, maturities for less than one year in 2019, forward contracts used to hedge anticipated
sales denominated in United States Dollar and other currencies. Next, forward contracts used
by them to hedge receivables denominated in United States Dollar, European Union Euro and
other currencies. In addition, forward contracts used to hedge intercompany receivables
denominated in Chinese Renminbi. After that, they use forward contract to hedge anticipated
purchases denominated in United States Dollar, European Union Euro, Australian Dollar and
other currencies. They also use forward contracts to hedge payables denominated in United
States Dollar, European Union Euro and other currencies. Lastly, Sime Darby Bhd use
forward contracts to hedge borrowings denominated in United States Dollar.
4.2 Interest rate swap contracts
Sime Darby Bhd had previously entered into interest rate swap contracts for certain long-term
borrowings to reduce their exposure to volatility in interest rates. The interest rate swap
contracts, all plain vanilla, have expired during the financial year. As at 30 June 2019, the
Group’s percentage of fixed rate borrowings to the total borrowings was 1.3% (2018: 1.3%
and 7.3% before and after taking into account interest rate swap contracts respectively).
Effective Range of weighted
Period average rate per Notional amount in original currency
annum Original 2019 2018
currency
12 December 1.822% to 1.885% USD - 33000000
2012 to 12
December 2018
30 June 2015 to 3.938% RM - 42000000
17 December
2018

The notional amount, fair value and maturity periods of the interest rate swap contracts are as
follows:
Notional amount Fair value assets
2019 2018 2019 2018
Maturity period:

- due no later
than one year
- 175000000 - 1000000
 - 175000000 - 1000000

4.3 Cross currency swap contract

Sime Darby Bhd had previously entered into a cross currency swap contract to exchange the
principal payments of a USD loan into AUD, the functional currency of the subsidiary, to
reduce their exposure from adverse fluctuations in foreign currency. This contract has expired
during the financial year ended 30 June 2019.
Notional amount Fair value assets
2019 2018 2019 2018
Maturity period:

- due no later
than one year
- 178000000 - 43000000
- 178000000 - 43000000

5.0 Conclusion
Sime Darby Bhd is one of the big companies in Malaysia that listed in Bursa Malaysia KLCI
index. There are four risk face by Sime Darby Bhd which is foreign exchange risk, interest
rate risk, credit risk and liquidity and cash flow risk. Sime Darby using derivative instruments
such as forward foreign exchange contracts, interest rate swap contracts, cross currency swap
contract and commodity futures contracts. To hedging and managing risk, Sime Darby Bhd
use derivative instrument like interest rate swaps, cross currency swaps and forward foreign
exchange. Lastly, Sime Darby Bhd Group’s must think out of the box how to manage and
hedge risk in the future and they can settle that risk properly.

6.0 Recommendation
For recommendation, we suggest to Sime Darby Bhd must determine at the highest level of
policy and decision making the scope of its involvement in derivatives activities and policies
to be applied. We also suggest Sime Darby Bhd should assess the credit risk arising from
derivatives activities based on frequent measures of current and potential exposure against
credit limits. Next, they can reduce credit risk by broadening the use of multi-product master
agreements with close-out netting provisions, and by working with other participants to
ensure legal enforceability of derivatives transactions within and across jurisdictions. In
addition, the Sime Darby Bhd should authorize only professionals with the requisite skills
and experience to transact and manage the risks, as well as to process, report, control, and
audit derivatives activities. Furthermore, they can quantify its market risk under adverse
market conditions against limits, perform stress simulations, and forecast cash investing and
funding needs. Last but not least, Sime Darby Bhd should regularly perform simulations to
determine how their portfolios would perform under stress conditions. Simulations of
improbable market environments are important in risk analysis because many assumptions
that are valid for normal markets may no longer hold true in abnormal markets. Last but not
least, Sime Darby Bhd must ensure that adequate systems for data capture, processing,
settlement, and management reporting are in place so that derivatives transactions are
conducted in an orderly and efficient manner in compliance with management policies. They
should have risk management systems that measure the risks incurred in their derivatives
activities including market and credit risks.
Lastly, we suggest to them to do more investment in other country and they must get more
experience about investment after this.
7.0 References

https://www.bursamalaysia.com/market_information/announcements/company_announceme
nt/announcement_details?ann_id=2994644

http://www.simedarby.com/investor/financial-results