Annual Report 2019

224 Transport International Holdings Limited 2019 Annual Report Notes to the Financial Statements (Expressed in Hong Kong dollars unless otherwise indicated) 31 Financial risk management and fair values of financial instruments (continued) (d) Currency risk The Group is exposed to currency risk primarily through purchases of new buses and motor vehicle components from overseas, investments in debt securities and deposits placed at banks that are denominated in a currency other than the functional currency of the entity to which they relate. The currencies giving rise to this risk are primarily British Pounds Sterling, United States dollars and Renminbi. The Group hedges approximately 94% (2018: 96%) of its estimated foreign currency exposure in respect of highly probable forecast purchases denominated in British Pounds Sterling. The Group uses forward foreign exchange contracts to manage its currency risk. For the year ended 31 December 2019, the Group designates those forward foreign exchange contracts as hedging instruments in cash flow hedges and does not separate the forward and spot elements of a forward foreign exchange contract but instead designates the forward foreign exchange contract in its entirety in a hedging relationship. Correspondingly, the hedged item is measured based on the forward exchange rate. The Group applies a hedge ratio of 1:1 and determines the existence of an economic relationship between the forward foreign exchange contracts and the highly probable forecast transactions based on their currency amounts and the timing of their respective cash flows. The main sources of ineffectiveness in these hedging relationships are: (i) the effect of the counterparty’s and the Group’s own credit risk on the fair value of the forward foreign exchange contracts which is not reflected in the change in the value of the hedged cash flows attributable to the forward rate; and (ii) changes in the timing of the hedged transactions. At 31 December 2019, the Group did not have any outstanding forward foreign exchange contracts (2018: liabilities of $1,346,000 were recognised as derivative financial liabilities and included in “Accounts payable and accruals” (note 24) line item in the consolidated statement of financial position). At 31 December 2018, these forward foreign exchange contracts were for the purchases of British Pounds Sterling totalling 10,100,000. They had maturities of less than one year after the end of the reporting date and had an average exchange rate of 10.10 between British Pounds Sterling and Hong Kong dollars.