FAIRFAX MEDIA  LIMITED  2013  117 NOTEs TO THE FINANCIAL sTATEMENTs  36. FINANCIAL AND CAPITAL RIsk MANAGEMENT (CONTINUED) FAIRFAx MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 30 JUNE 2013 The Group is exposed to foreign exchange risk from various currency exposures, primarily with respect to: • United States Dollars; and • New Zealand Dollars. Forward foreign exchange contracts are used to hedge the Group’s known non-debt related foreign currency risks. These  contracts generally have maturities of less than twelve months after the reporting date and consequently the net fair value  of the gains and losses on these contracts will be transferred from the cash flow hedging reserve to the income statement at  various dates during this period when the underlying exposure impacts earnings. The derivative contracts are carried at fair  value, being the market value as quoted in an active market. The Group’s risk management policy for foreign exchange is to only hedge known or highly probable future transactions.  The policy only permits hedging of the Group’s underlying foreign exchange exposures.  Benefits or costs arising from currency hedges for revenue and expense transactions that are designated and documented in  a hedge relationship are brought to account in the income statement over the lives of the hedge transactions depending on the  effectiveness testing outcomes and when the underlying exposure impacts earnings. For transactions entered into that hedge  specific capital or borrowing commitments, any cost or benefit resulting from the hedge forms part of the initial asset or liability  carrying value. When entered into, the Group formally designates and documents the financial instrument as a hedge of the underlying  exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. The Group formally  assesses both at the inception and at least semi-annually thereafter, whether the financial instruments that are used in hedging  transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because  of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations  in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying  exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognised  in the income statement and this is mainly attributable to financial instruments in a fair value hedge relationship. Derivatives  entered into and not documented in a hedge relationship are revalued with the changes in fair value recognised in the income  statement. All of the Group’s derivatives are straight forward over the counter instruments with liquid markets. Refer to Note 16 for further details of the Group’s derivative financial instruments and details of hedging activities. SENSITIVITY ANALYSIS The tables below show the effect on net profit and equity after income tax as at reporting date from a 15% weaker/stronger base  currency movement in exchange rates at that date on a total derivative portfolio with all other variables held constant. A sensitivity of 15% has been selected as this is considered reasonable given the current level of exchange rates and the volatility  observed both on a historical basis and market expectations for potential future movement. The Group’s foreign currency risk  from the Group’s long term borrowings denominated in foreign currencies has no significant impact on profit from foreign  currency movements as they are effectively hedged. (A) Aud / nZd Comparing the Australian Dollar exchange rate against the New Zealand Dollar, a 15% weaker Australian Dollar would result in an  exchange rate of 1.0045 and a 15% stronger Australian Dollar in an exchange rate of 1.3590 based on the year end rate of 1.1818.  This range is considered reasonable given over the last five years, the Australian Dollar exchange rate against the New Zealand  Dollar has traded in the range of 1.0781 to 1.3746. IMPACT ON POST-TAX PROFIT IMPACT ON EQUITY (HEDGING RESERVES) * 2013 $’000 2012 $’000 2013 $’000 2012 $’000 If the AUD exchange rate was 15% weaker against the NZD with all other  variables held constant – increase/(decrease)  852   1,092   (31,522)  (29,424) If the AUD exchange rate was 15% stronger against the NZD with all other  variables held constant – increase/(decrease)  (630)  (1,932)  23,299   21,748  *  Hedging reserves includes both the cash flow hedge reserve and net investment hedge reserve