Use and fair value of financial instruments

In the normal course of business we use both derivative and non-derivative financial instruments.

The fair value of Group net borrowings at the year end was £504 million against a book value of £464 million (2010 – fair value £823 million; book value £814 million).

Derivative financial instruments used to manage the interest rate and currency of borrowings had a fair value of £4 million liability (2010 – £9 million liability). The main types of instrument used are interest rate swaps, interest rate options (caps or floors) and cross-currency interest rate swaps.

The fair value of other derivative financial instruments hedging future currency and commodity transactions was £3 million asset (2010 – £6 million liability). When managing currency exposure, we use spot and forward purchases and sales, and options.

The fair value of other derivative financial instruments accounted for as held for trading was £2 million asset (2010 – £22 million).

Fair value estimation

The fair value of derivative financial instruments is based on the market price of comparable instruments at the balance sheet date if they are publicly traded. The fair value of the forward currency contracts has been determined based on market forward exchange rates at the balance sheet date. The fair values of short-term deposits, receivables, payables, loans and overdrafts with a maturity of less than one year are assumed to approximate their book values. The fair values of bonds, bank and other loans, including finance lease liabilities due in more than one year, are estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments, adjusted for the fair valuation effects of currency and interest rate risk exposures, where those instruments form part of related hedging relationship agreements, financial and commodity forward contracts and options, and commodity futures. The value of certain items of merchandisable agricultural commodities that are included in inventories are based on market prices.