Most of Lenovo’s exchange rate risks arise primarily with respect to United States dollar, Chinese Yuan (CNY), and European Dollar (EUR).
By going through the annual report we understand that Lenovo’s foreign currency risk arises from anticipated revenue, recognized assets and liabilities and its net investment in foreign operations. The company’s annual report shows individual entities are measured using the currency of the primary economic environment in which the entity operates. USD, is Lenovo Group’s functional and presentation currency. Lenovo’s financial risk management program established as part of its ERM is responsible for managing Lenovo Group’s exposure to exchange rate risk. Similar to what we saw in AAPL and HPQ, because of the global nature of its business, Lenovo is impacted both by a stronger US dollar and also a weaker US dollar.
Having a strong US dollar favors Lenovo who source their components from suppliers located outside of United States, but negatively impacts its sales figures which were contributed by foreign-currency. Lenovo uses derivative financial instruments to hedge currency risk exposures. We see that the company’s forward foreign exchange contracts are either used: a) to hedge a percentage of future transactions (cash flow hedges) or b) as fair value hedges for identified assets and liabilities.
We see in figure 4.8 organization’s exposure to FX risk arising from recognized assets or liabilities denominated in a currency other than the functional currency.Lenovo uses its organizational hedging policy for business transactions to reduce the risk of currency fluctuation arising from daily operations. As of March, 2017, Lenovo had forward foreign exchange contracts of US $8,216 million which in 2016 was US $6,872 million. Lenovo’s forward foreign exchange contracts are either used to hedge a percentage of future anticipated transactions which has a very hi probability of occurrence or used as fair value hedges.
For presentation purposes, the amounts of the exposure are shown in United States dollar, translated using the spot rate at the balance sheet date. Differences resulting from the translation of the financial statements of foreign operations into the Lenovo’s presentation currency are excluded.