34. Financial risk management objectives and policies

Financial Risk Factors

The Group, by nature of its business and geographical positioning, is exposed to financial risks. The Group's overall risk management programme focuses on financial market fluctuations and aims to minimize the potential unfavorable impact of those fluctuations on its financial performance. The Group does not engage in speculative transactions or transactions which are not related to its commercial, investing or borrowing activities.

Foreign Exchange Risk

Group exposure to exchange rate (FX) risk derives primarily from existing or expected cash flows denominated in currencies other than the Euro (imports / exports) and from international investments. This risk is addressed in the context of policies approved by the Board of Directors at regular intervals.

FX risks are managed using natural hedges, FX options and FX forwards. Borrowings are denominated in the same currency as the assets that are being financed (where feasible), therefore creating a natural hedge for investments in foreign subsidiaries whose equity is exposed to FX conversion risk.

However, part of the financing of Group activities in the USA, Turkey, Egypt and Albania, is in different currencies than the functional ones. Their refinancing in local currencies is examined at regular intervals.

Ιn Egypt, the financing in Yen had been hedged up to January 2014 via FX forwards in US dollar/Yen, that were executed on behalf of the Group’s subsidiary Iapetos Ltd. As at December 31, 2013, the fair value of the forward exchange contract was recorded as a liability of €543 thousand in the statement of financial position.

In 2009, Titan Global Finance granted to Group subsidiary Titan America LLC a loan of €100 million, maturing in July 2013. At the same time, Titan America LLC also entered into forward foreign exchange contracts which expired on July 26, 2013. The transactions were undertaken in order to hedge the foreign currency risk (€/$) associated with the Euro denominated borrowing. At the inception of the hedge relationship, Titan America LLC formally designated the hedge as a cash flow hedge and documented the risk management objective and strategy for undertaking the hedge. The hedge was assessed to be highly effective. In July 2013, Titan Global Finance extended the maturity of the loan to January 2017. Titan America LLC has not entered into new forward foreign exchange contracts due to unfavorable market conditions.

Ιn the first semester of 2012, the Group's subsidiary Titan America LLC entered into new borrowings of €53.5 mil. from Titan Global Finance. At the same time, Titan America LLC also entered into forward foreign currency exchange contracts with two third-party financial institutions. The transactions were undertaken in order to hedge the foreign currency risk (€/$) associated with the Euro denominated borrowing. At the inception of the hedge relationship, Titan America LLC formally designated the hedge as a cash flow hedge and documented the risk management objective and strategy for undertaking the hedge. The hedge was assessed to be highly effective.

The above mentioned instruments were initially recognized at fair value on the effective date of the contract, and are being subsequently remeasured at fair value. As at December 31, 2013, the fair value of the derivative contracts was recorded as an asset of €1,566 thousand (31.12.2012: a liability of €315 thousand) in the statement of financial position. As these derivative instruments have been designated as a cash flow hedge, a gain of €230 thousand arising from changes in fair value of the derivatives was recognized through the statement of comprehensive income as a separate component of equity.

Commitments to buy and sell foreign currencies:

The amounts below represent the net Yen and Dollar equivalents to purchase and sell foreign currencies. The Yen and Dollar contracts will be utilized during the next twelve months.

Sensitivity analysis in foreign exchange rate changes

The following table demonstrates the sensitivity of the Group’s profit before tax and the Group’s equity to reasonable changes in the USΑ Dollar, Serbian Dinar, Egyptian Pound, British Pound, Turkish Lira and Albanian Lek floating exchange rates, with all other variables held constant:

Note: a) Calculation of "Effect on Profit before tax" is based on year average FX rates; calculation of "Effect on Equity" is based on year end FX rate changes, b) the above sensitivity analysis is based on floating currencies and not on fixed.

The Company has limited (relative to the Group) exposure to changes in foreign exchange rates. The majority of transactions and balances are in Euro, and hence, a 5% change in the aforementioned currencies would have an overall impact of less than €50 thousand.