This excerpt taken from the LUX 6-K filed May 12, 2009.
The purpose of the Financial Risk Management Policy is to define consistent principles for risk management for all companies belonging to Luxottica Group. The Board of Directors of Luxottica Group is responsible to approve this Policy and defines the:
The principles and rules set out by this Policy shall be followed throughout the Group. This Policy supports the objective of effective and uniform risk management in the interest of the entire company belonging to Luxottica Group.
Luxottica Groups financial risks are related either to financial assets and liabilities denominated in local and foreign currencies (Interest Rate Risk) or to incomes and expenses denominated in currencies other than the functional currency (Foreign Currency Risk).
Interest rate risk is defined as follow:
Floating rate assets or liabilities are related to the first definition above, while fixed rate assets or liabilities are under the second one.
The value of assets and liabilities are directly dependent on the prevailing interest rate level. The interest rate risk of assets and liabilities can be categorised into flow risk and price risk defined as follows:
flow risk refers to the sensitivity of the interest amounts to changes in interest rates. The flow risk is covered by Cash Flow hedge instruments, as defined below.
price risk refers to the sensitivity of the market value of assets and liabilities to changes in the level of market interest rates. The price risk is covered by Fair Value hedge instruments, as defined below.
As a consequence the objective of interest rate risk management is to reduce the uncertainty of the Groups net interest result.
This is achieved reducing the volatility of the interest impact in the Groups income statement and controlling the fluctuation of the net debt market value.
In order to pursue the above risk management objective, the whole Groups interest rate risk exposure, in term of notional amount, has to be composed as a mix of fixed interest rate and floating interest rate where neither of the two components will be lower than 25% or higher than 75%.
Foreign currency risk is defined as follow:
The objective of foreign currency risk management is to support the Group in minimising the uncertainty and reaching its business objectives set by Group Planning by limiting this uncertainty, e. g. through minimizing the impact on income statement of a random effects of currency rate changes.
Groups foreign currency position is divided into transaction, translation and competitive position. Positions are managed separately because of their different natures and effects on the Groups income statement and balance sheet. The total position at Group level consists of all recognised currency dependent items.
Transaction risk is defined as the effect coming from difference in foreign currency rates at the time of pricing or contracting and of realization of a transaction. Transaction risk is defined in relation to the base currency of a company.
Translation risk is defined as the effects of changes in foreign currency rates on the consolidated income statement and balance sheet of the Group. As the foreign Group Companies income statement and balance sheets are translated into the Group functional currency using market foreign currency rates, the values of the Groups consolidated net income, assets, debt and equity change. In addition to the absolute amounts, also the balance sheet ratios like gearing and equity ratio may change, if the proportion of net income, assets, equity, debt and equity in the various currencies differ.
Competitive risk refers to the Groups foreign currency rate sensitivity in comparison to its competitors, i.e. to the long term effects of currency rate changes to the economic position of the Group in any affected market.