7. TREASURY MANAGEMENT A substantial portion of Reuters revenue is committed under one- and two-year contracts and approximately 80% is denominated in non-sterling currencies. Reuters also has significant costs denominated in foreign currencies with a different mix from revenue. Reuters profits are, therefore, exposed to currency fluctuations. The approximate proportion of operating profit excluding goodwill amortisation and currency gains attributable to each key currency group was as follows:
	Operating profit by currency 1999 1998 Continental Europe - euro currencies 80% 80% - other 19% 19% US dollar 49% 54% Japanese yen 12% 13% Sterling - depreciation (52% ) (59% ) - other (19% ) (22% ) Other 11% 15% Total 100% 100%
	Sterling costs exceeded sterling revenues due to the level of UK-based marketing, development, operational and central management costs and depreciation which, with the exception of Instinet, is largely accounted for in sterling once an asset has been acquired. In broad terms using the 1999 mix of profits, the impact of an additional unilateral 1% strengthening of sterling would have been a reduction of approximately £10 million on operating profits before hedging (1998: £9 million). Exchange rates had a small favourable impact on operating profits before hedging in 1999 compared with 1998.
	The risk that sterling might strengthen against foreign currencies is hedged within parameters laid down by the Board. The priority in treasury policy is to reduce the risk of year on year earnings volatility to acceptable levels while allowing a degree of flexibility to take advantage of market movements. The main principles underlying currency hedging policies are as follows: Committed hedging cannot exceed the underlying cash flow exposure; Options may only be written against an underlying exposure; Levels of cover for currency hedging cannot exceed 90% of underlying exposure for the first 12 months and 70% for the following 12 months. The company has adopted value at risk (“VAR”) analysis as a means of quantifying the potential impact of exchange rate volatility on reported earnings. VAR is a measure of the potential loss on a portfolio within a specified time horizon, at a specified confidence interval. Loss is defined, in this instance, as the diminution in value of rolling 12-month forecast group profits denominated in sterling. Due to the approximations used in determining VAR, the theory provides order of magnitude estimates only but these are useful for comparison purposes.
	Reuters estimates that at 31 December 1999 there is a 5% chance that profits forecast for the coming 12 months will deteriorate by more than £52 million as a result of currency fluctuations before hedging and £27 million after hedging (1998: £70 million before hedging and £37 million after hedging). These figures represent the value at risk and are illustrated graphically.
	During 1999 the average value at risk on forecast profits for the coming 12 months was as follows:
	Value at risk £m Before hedging After hedging 1999  Average 60 33          High 72 40          Low 52 27 1998  Average 64 35
	The gains on currency hedging activities for the three years to December 1999 are summarised below:
	Recognised gains/(losses) £m 1999 1998 1997 Currency hedging 9 45 56 Interest rate hedging (1 ) 2 2
	Recognised currency hedging gains were lower in 1999 compared with 1998 due mainly to the relative strength of sterling versus other European currencies when hedging for 1999 was undertaken. Of the currency gains recognised in 1999, £6 million related to contracts in place at the end of 1998. Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. Unrecognised gains and losses on instruments used for hedging, and the movements are set out below:
	Currency hedging £m Gains (Losses ) Net Unrecognised at 1 January 1999 7 (13 ) (6 ) Arising in previous years - recognised in 1999 7 (10 ) (3 ) - not recognised in 1999 0 (3 ) (3 ) Arising in 1999 - not recognised in 1999 16 (9 ) 7 Unrecognised at 31 December 1999 16 (12 ) 4 Of which: - expected to be recognised in 2000 15 (10 ) 5 - expected to be recognised in 2001 or   later 1 (2 ) (1 )
	Unrecognised gains of £4 million at 31 December 1999 compare with unrecognised losses of £6 million at 31 December 1998. The improvement reflects the strength of sterling at the end of 1999 compared with the end of 1998. Net cash flows are mainly converted into sterling and either applied to reduce debt or invested in money market instruments with financial institutions holding strong credit ratings. The maturity of investments and debt are matched to minimise interest rate risk. Interest rates are managed using a mix of financial instruments which commence and mature at various dates through to November 2004. Most interest rate hedging relates to the use of interest rate swaps to shorten the interest rate profile on medium term fixed rate notes issued.
	Interest rate hedging £m Gains (Losses ) Net Unrecognised at 1 January 1999 0 (1 ) (1 ) Arising in previous years - recognised in 1999 0 (1 ) (1 ) Arising in 1999 - not recognised in 1999 0 (17 ) (17 ) Unrecognised at 31 December 1999 0 (17 ) (17 ) Of which: - expected to be recognised in 2000 0 (7 ) (7 ) - expected to be recognised in 2001 or   later 0 (10 ) (10 )
	Unrecognised losses of £17 million on interest rate hedging at 31 December 1999 are a result of the increase in sterling interest rates since interest rate swaps were put in place and are offset by compensating adjustments to the fair value of the fixed rate notes issued. In broad terms, using the average net funds position, a 1% increase in global interest rates would have reduced profit before tax in 1999 by approximately £1 million (1998: £1 million) excluding the impact of hedging.