HERMÈS - 2019 Universal Registration Document

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OVERVIEW OF THE GROUP RISK FACTORS

FOREIGN EXCHANGE RISK ●

1.11.5.2

DESCRIPTION OF THE RISK s

RISK MANAGEMENT s

This exposure is hedged in order to minimise and anticipate the impact of currency fluctuations on the Group’s profits. The Group’s foreign exchange risk exposure management policy is based on the following principles: the manufacturing subsidiaries invoice the distribution subsidiaries in • their local currency, applying an annual exchange rate on the scales established in euros. This means that the distribution subsidiaries mainly concentrate most of the foreign exchange risk; the Group’s foreign exchange risk is systematically hedged by Hermès • International on an annual basis, based on future internal operating cash flows between the companies in the Group; no speculative transactions in the economic meaning of the term are • authorised; these hedges are provided through firm foreign exchange transactions • and/or optional transactions eligible for hedge accounting; other non-operating transactions are hedged against foreign exchange • risk as soon as the commitment is firm and final. It corresponds to financial risks arising from intra-group loans and dividends in foreign currencies. These management rules have been validated by the Executive Committee and have also been endorsed by the Supervisory Board. The administrative management and control of these transactions are provided by the middle & back office department, notably by means of an integrated cash software program. In addition, Hermès International’s audit and risk management department ascertains compliance with the risk control and management procedures. Within this set of rules, management’s decisions are validated by the Executive Committee, via a Treasury Security Committee that meets on a regular basis. According to the above policy, the Group’s foreign exchange risk is hedged annually by Hermès International, based on highly probable future cash flows derived from budget projections. In practical terms, at 31 December, the hedging of internal transactions in currencies for the following year is close to 100%. As such, the Group uses purchases and sales of put and call options as well as currency swaps and forward currency agreements. Quantitative information on foreign exchange risk impacts is provided in Note 25.2 to the consolidated financial statements. The treasury department constantly monitors changes in legal regulations with regard to derivative transactions to ensure that the Group conforms to current regulations. Furthermore, the finance department adjusts its procedures and tools on an ongoing basis to accommodate changes in its environment. Thanks to the exchange rate hedging policy, the impacts are pre-empted. Losses, if any, are offset, in part or in full, by price increases determined by region.

The Group is naturally exposed to foreign exchange risk because the bulk of its production is located in the eurozone, but the majority of its sales revenue is received in currencies other than the euro (American dollars, Japanese yen and other Asian currencies, etc.). At 31 December 2019, over 70% of the Group’s sales are made in a currency other than euro.

POTENTIAL IMPACTS ON THE GROUP s Financial losses.

2019 UNIVERSAL REGISTRATION DOCUMENT HERMÈS INTERNATIONAL

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