This excerpt taken from the MTA 20-F filed Jun 27, 2007.
Magyar Telekom is exposed to interest and foreign exchange rate risk associated with its cash and debt portfolio and anticipated transactions. Magyar Telekom is exposed to foreign exchange risk related to holding foreign currency cash balances, and operating activities through revenues from and payments to international telecommunications carriers as well as capital expenditure contracted with vendors in foreign currency. As the vast majority of the revenues and expenses of the Hungarian entities arise in HUF, the functional currency of Magyar Telekom is HUF, and as a result, Magyar Telekoms objective is to minimize the level of its financial risk in HUF terms. During 2006 and 2005, the Groups borrowings were denominated primarily in HUF. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the EUR and USD. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities.
The Group has subsidiaries in the Southern and Eastern European region, whose net assets are exposed to foreign currency translation risk. The Group is present in Macedonia, Montenegro, and to a lesser extent in Bulgaria, Romania and Ukraine. Romania and Bulgaria joined the European Union on January 1, 2007, which over time mitigates the currency risk of these countries. The high amount of foreign currency (EUR and USD) denominated cash portfolio accumulated by the Macedonian subsidiaries creates additional foreign exchange risk exposure on local and Group level.
Magyar Telekom occasionally enters into derivative contracts for risk reduction purposes. These foreign currency forward contracts are taken to reduce the exchange rate risk related to the foreign exchange denominated payment obligations and expected cash inflows.