NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 28 July 2018 E2 DERIVATIVE FINANCIAL INSTRUMENTS 2018 2017 $'000 $'000 Current assets Forward foreign exchange contracts (i) 6,725 - Total current derivative financial instrument assets 6,725 - Non-current assets Forward foreign exchange contracts (i) 269 - Total non-current current derivative financial instrument assets 269 - Current liabilities Forward foreign exchange contracts (i) 64 7,417 Interest rate swap contracts (ii) - 527 Total current derivative financial instrument liabilities 64 7,944 Non-current liabilities Forward foreign exchange contracts (i) 12 958 Interest rate swap contracts (ii) 52 - Total non-current derivative financial instrument liabilities 64 958 (a)Instruments used by the Group The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (refer to note E1). (i) Forward exchange contracts - cash flow hedges The Group makes purchases in numerous currencies, primarily US dollars. In order to protect against exchange rate movements, the Group has entered into forward exchange contracts to purchase US dollars and Euro. These contracts are hedging highly probable forecasted purchases for the ensuing financial period. The contracts are timed to mature when payments for shipments of inventory are scheduled to be made. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the cash flows occur, the Group adjusts the initial measurement of the inventory recognised in the balance sheet by the related amount deferred in equity. (ii) Interest rate swap contracts Bank loans of the Group currently bear an average variable interest rate of 3.20% (2017: 3.00%). It is the Group's policy to protect part of the loans from exposure to increasing interest rates. Accordingly, the Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. Swaps currently in place cover approximately 67% (2017: 69%) of the Group’s drawn debt facility (refer to note D3 for details of the Group’s borrowings). The notional principal amounts used in the swap agreements match the terms of the debt facilities. Under the swap agreements, the fixed interest rates range between 1.96% and 2.13% (2017: 3.31% and 3.90%) and the variable rates are based on the Bank Bill Swap Rate bid (BBSY Bid). The contracts require settlement of net interest receivable or payable every three months. The contracts are settled on a net basis. The gain or loss from remeasuring the hedging instruments at fair value is deferred in equity in the hedging reserve, to the extent that the hedge is effective, and reclassified into the income statement when the hedged interest expense is recognised. In the period ended 28 July 2018, $0.7million was reclassified in profit and loss (2017: $2.2 million) and included in finance cost. There was no hedge ineffectiveness in the current period. (b) Risk exposures Information about the Group's exposure to credit risk, foreign exchange and interest rate risk is provided in note E1. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of derivative financial assets mentioned above. Myer Annual Report 2018 71