Universal Registration Document 2020

5.1.6.1.3 Management of foreign exchange risk

Due to the diversification of its activities and geographical locations, the Group is exposed to the risk of exchange rate fluctuations, which may have an impact on the translation differences affecting balance sheet items, Group financial expenses, equity, net income and the IRR of projects.

To limit exposure to foreign exchange risks, the Group has introduced the following management principles:

• local currency financing: to the extent possible given the local financial markets’ capacities, each entity finances its activities in its own functional currency. When financing is contracted in other currencies, derivatives may be used to limit foreign exchange risk;
• matching of assets and liabilities: the net assets of subsidiaries located outside the Euro zone expose the Group to a foreign exchange risk. The foreign exchange risk in the consolidated balance sheet is managed by market hedging involving use of financial derivatives. Hedging of net assets in foreign currencies complies with risk/return targets, and the hedging ratio varies depending on the currency, ranging from 46% to 67% for the principal exposures. If no hedging instruments are available, or if hedging costs are prohibitive, the foreign exchange positions remain open and the risk on such positions is monitored by sensitivity calculations;
• hedging of operating cash flows in foreign currencies: in general, the operating cash flows of EDF and its subsidiaries are in the relevant local currencies, with the exception of flows related to fuel purchases which are primarily in US dollars, and certain flows related to purchases of equipment, which concern lower amounts.Under the principles laid down in the Strategic financial management framework,EDF and the main subsidiaries concerned by foreign exchange risks (EDF Energy,EDF Trading, Edison, EDF Renewables) are required to hedge firm or highly probable commitments related to these future operating cash flows.

As a result of the financing and foreign exchange risk hedging policy, the Group’s gross debt at 31 December 2020 breaks down as follows by currency after hedging:

GROSS DEBT STRUCTURE BY CURRENCY BEFORE AND AFTER HEDGING

The table below presents the impact on equity of a variation in exchange rates on the Group’s gross debt at 31 December 2020.

EXCHANGE RATE SENSITIVITY OF THE GROUP’S GROSS DEBT