Engineer Rolls Royce (RR.) logged a £2 billion loss on currency derivatives as a result of the decline in sterling over the first six months of 2016.
Rolls uses currency derivatives, totalling $35 billion (£26.5 billion) in value, to reduce the impact on its business of large and unexpected currency swings.
When sterling weakens, which should increase the value of Rolls’ sales and profits, its currency hedges lose money, and vice versa.
Gains or losses on currency hedging are excluded from underlying earnings but even so the size of the first half loss on the products is eye watering.
'MARK TO MARKET'
‘At each reporting date our foreign exchange hedge book is included in the balance sheet at fair value ('mark-to-market'),’ says company in its interim report.
‘The movement in this valuation during the period, after taking account of contracts settled, is included in the reported profit. As the Group has a large hedge book ($35 billion), the movements can be significant, depending on changes in exchange rates.
'In H1 2016 this resulted in a charge of £2,155 milliom.
‘The hedge book is held to manage the impact of changes in exchange rates on future foreign currency income.
‘Accordingly, non-cash changes in its value are excluded from the underlying results as they do not relate to the trading in the period.’
FOREX IMPACT IN 2016
Separately, chief executive Warren East says a weaker currency will add £600 million to revenue and £60 million to underlying profit-before-tax in the 2016 financial year.
Shares in Rolls are among the biggest gainers on the FTSE 100, up 10% to 806p, as East says the business is on track to become more profitable and cash generative via a range of new initiatives.
Ahead of the update, markets may have been concerned about the big jump in earnings Rolls needs to deliver in the second half of 2016 to reach its full-year expectations.
Analysts expect full year earnings per share to hit 25p in the year to 31 December 2016 but it only delivered 4.2p in the first half.
East confirmed the business is on track to deliver a full-year result in-line with expectations.