Notes to the Consolidated Financial Statements Continued Note 3. Financial Risk Management continued (a) Market Risk continued (i)Foreign Exchange Risk continued The Group manages foreign exchange risk at the corporate level by monitoring forecast cash flows in currencies other than US$ and ensuring that adequate Brazilian REAL and A$ cash balances are maintained. Foreign currencies are bought on the spot market in excess of immediate requirements. Where currencies are purchased in advance of requirements, these balances do not usually exceed 3 months’ requirements. The appropriateness of A$ and Brazilian REAL holdings are reviewed regularly against future commitments and current $A and Brazil REAL market expectations. Periodically, sensitivity analysis is conducted to evaluate the potential impact of unfavourable exchange rates on the Group’s future financial position. The results of this evaluation are used to determine the most appropriate risk mitigation tool to be used. The Group will hedge when it is deemed the most appropriate risk mitigation tool to be used. Foreign currency hedging transactions were not entered into during the financial year or previous financial year. The Group is not exposed to material translation exposures at the end of the current financial year as the majority of its financial assets and liabilities are denominated in US$ and as such, no foreign currency sensitivity analysis has been disclosed. (ii)Interest Rate Risk Interest rate risk is the risk that the fair value of future cash flows of financial assets and financial liabilities will fluctuate because of changes in market interest rates. Interest rate risk is managed on a Group basis at the corporate level. As at 30 June 2021 and 30 June 2020, there was no interest rate hedging in place. The Group’s interest rate risk arises from relevant financial assets, primarily cash and cash equivalents deposited at variable rates of interest and security deposits related to Australia and Brazil. As the majority of cash and cash equivalents is in US$ dollars, the primary exposure is to US$ interest rates. At year end, as a result of the Baúna acquisition during the financial year, the Group is also exposed to interest on the deferred consideration payable to Petrobras of $41.4 million ($42.4 million including interest at year end) at 1 month LIBOR plus a 3% margin. An analysis of the Group’s exposure to interest rate risk for financial assets and financial liabilities at the end of the financial year is set out below: Consolidated Weighted Floating Fixed Average Interest Interest Non‑interest Carrying Interest Rate Rate Rate Bearing Fair Value Amount 2021 % p.a. US$’000 US$’000 US$’000 US$’000 US$’000 Financial assets Cash and cash equivalents 0.11 71,487 – 61,722 133,209 133,209 Receivables – – – 34,162 34,162 34,162 Security deposits 3.27 1,372 169 73 1,615 1,615 Total financial assets 72,859 169 95,957 168,986 168,986 Financial liabilities Trade and other payables 3.10 42,422 – 36,643 79,066 79,066 Other financial liabilities 2.00 – 71,161 – 71,161 71,161 Lease liabilities – – – 312,840 312,840 312,840 Total financial liabilities 42,422 71,161 349,483 463,067 463,067 Karoon Energy Ltd 94 Annual Report 2021