| Risk management
The Board has established a risk management committee with accountability for the system of risk management and reporting the key risks and associated mitigating actions. A Director of Risk Management, reporting to the Finance Director, has been appointed. The risk management process complies with the Turnbull committee guidance on internal control, issued in September 1999. This brings together the various risk management and audit activities throughout the company, including Business Assurance, which carries out internal audit duties. Treasury management
The Group uses various financial instruments in order to manage the exposures that arise in its business operations as a result of movements in financial markets. The Group does not trade in financial instruments for profit generation. All treasury activities are focused on the management of risk. There have been no significant changes in the Group's policies in the last year. The main risks continue to be movements in foreign currency exchange rates, interest rates and commodity prices. The Board regularly reviews the Group's exposures and risk management and a specialist committee also considers these in detail. All such exposures are managed by the Group Treasury function, which reports to the Finance Director and which operates within written policies approved by the Board and within the internal control framework described in the report of directors. Foreign exchange
The Group is exposed to movements in exchange rates for both foreign currency transactions and the translation of net assets and profit and loss accounts of foreign subsidiaries. The Group does not hedge the translation effect of exchange rate movements on the profit and loss account or balance sheet as it regards its interest in overseas subsidiary companies as long-term investments. The Group is exposed to a number of foreign currencies. The most significant transactional currency exposure is the US dollar followed by the Euro. US dollar income, net of expenditure, represents 37 per cent of the UK turnover. The Group seeks to hedge its transactional exposure using a variety of financial instruments with the objective of minimising the impact of fluctuations in exchange rates on future transactions and cash flows. The permitted range of the amount of cover taken is determined by the written policies set by the Board, based on known and forecast income levels. The forward cover is managed within the parameters of these policies in order to achieve the Group's objectives, having regard to the Group's view of long-term exchange rates. US dollar cover extends for periods up to eight years, while Euro cover extends for periods up to four years. The majority of cover is in the form of standard foreign exchange contracts, although some cover, primarily of longer duration, includes instruments on which the exchange rates achieved may be dependent on future interest rates. The Group also writes currency options against a portion of the unhedged dollar income at a rate which is consistent with the Group's long-term target rate. The premium received from the sale of the options is included in the Group's achieved rate. Total US dollar cover approximated to four years' net US dollar income at December 31, 2000 (1999 two and a half years). The result of this policy has been to maintain a relatively stable long-term foreign exchange rate. Credit risk management
The Group's policy is to monitor and manage its exposure to counterparties. Credit limits are set to cover all financial instruments for each counterparty. The Group policy is that it is exposed only to those counterparties that have a long-term credit rating of A3/A- or better. Interest rate risk
The Group has historically managed its exposure to interest rates by using interest rate swaps to change fixed rate borrowings into floating rate borrowings in order to match rates achieved on short-term deposits and cash at bank. The Group has a net debt position as a result of acquisitions undertaken during late 1999. The acquisitions were originally financed by a
£1 billion syndicated loan facility on a floating rate basis. In order to secure the longer-term financing of the Group, two fixed rate bonds of £200 million and 500 million euro's were issued with maturities of 16 and seven years respectively. The balance of the Group's exposure to interest rates is managed via a combination of fixed rate borrowings, interest rate swaps and interest rate caps. Commodity risk
The Group has an ongoing exposure to the price of jet fuel arising from business operations. The Group's objective is to minimise the impact of price fluctuations. The exposure is hedged in accordance with parameters contained in a written policy set by the Board. Hedging is conducted using commodity swaps that extend for periods up to four years. Asset value guarantees
In civil aerospace markets, manufacturers will, from time to time, guarantee a portion of the future value of aircraft. This assists customers in financing the purchase of products. Rolls-Royce has a strong track record in managing the risks associated with asset value guarantees and has experienced no material losses from such obligations. As part of the management of these risks, the Group has taken the prudent step of insuring the gross exposure to asset value guarantees associated with a portfolio of Trent-powered Boeing and Airbus aircraft. Rolls-Royce has been able to develop this innovative arrangement as a result of recent developments in financial markets. | 
