Annual Review 2012 - Luxottica

Consolidated financial statements - NOTES
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as the exchange rate risk, the interest rate risk, credit risk and the utilization of derivative
and non-derivative instruments. The Policy also specifies the management activities, the
permitted instruments, the limits and proxies for responsibilities.
(a) Exchange rate risk
The Group operates at the international level and is therefore exposed to exchange rate
risk related to the various currencies with which the Group operates. The Group only
manages transaction risk. The transaction exchange rate risk derives from commercial and
financial transactions in currencies other than the functional currency of the Group, i.e.,
the Euro.
The primary exchange rate to which the Group is exposed is the Euro/USD exchange rate.
The exchange rate risk management policy defined by the Group’s management states
that transaction exchange rate risk must be hedged for a percentage between 50 percent
and 100 percent by trading forward currency contracts or permitted option structures with
third parties.
This exchange rate risk management policy is applied to all subsidiaries, including
companies which have been recently acquired.
If the Euro/USD exchange rate had changed by +/- 10 percent with all other variables
remaining constant, the decrease/increase in net income and equity would be equal
to, net of tax effect, Euro 56.7 million as of December 31, 2012 (Euro 34.5 million as of
December 31, 2011) and Euro 39.9 million as of December 31, 2012 (Euro 42.2 million as of
December 31, 2011), respectively.
Even if exchange rate derivative contracts are stipulated to hedge future commercial
transactions as well as assets and liabilities previously recorded in the financial statements
in foreign currency, these contracts, for accounting purposes, may not be accounted for
as hedging instruments.
(b) Price risk
The Group is generally exposed to price risk associated with investments in bond securities
which are classified as assets at fair value through profit and loss. As of December 31,
2012 and 2011, the Group investment portfolio was fully divested. As a result, there was
no exposure to price risk on such dates. The investment portfolio, in accordance with
contractual obligations, must not exceed a value at risk (VAR) of 2 percent with a confidence
level of 99 percent. The Group will periodically monitor the VAR level.
(c) Credit risk
c1) Credit risk exists in relation to accounts receivable, cash, financial instruments and
deposits in banks and other financial institutions.
The credit risk related to commercial counterparties is locally managed and monitored