HERMÈS - 2018 Registration document

Overview of the group

Risk factors

Risk management TheGroup’s foreign exchange risk exposuremanagement policy is based on the following principles: s s the manufacturing subsidiaries invoice the distribution subsidiaries in their local currency, applying anannual exchange rate on the scales established in euros. This means that the distribution subsidiaries mainly concentrate most of the foreign exchange risk; s s theGroup’s foreignexchange risk is systematically hedgedbyHermès International on an annual basis, based on future internal operating cash flows between the companies in the Group; s s no speculative transactions in the economic meaning of the term are authorised; s s these hedges are provided through firm foreign exchange transac- tions and/or optional transactions eligible for hedge accounting; s s other non-operating transactions are hedged against foreign exchange risk as soon as the commitment is firm and final. It corres- ponds 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 integratedcashsoftwareprogram.Inaddition,HermèsInternational’s Internal Audit 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. 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 next 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 23.2 to the consolidated financial statements. The treasury management department constantly monitors changes in legal regulations with regard to derivative transactions to ensure that the Group conforms to current regulations. Furthermore, the finance depart- ment adjusts its procedures and tools on an ongoing basis to accommo- date changes in its environment.

Risk management Pursuant to the applicable internal control procedures, the Group only deals with leading banks and financial institutions that have signed FBF and ISDA agreements on trading in forward financial instruments, and it is not exposed to any material counterparty risk. In addition, counter- party risks on financial transactions are monitored on an ongoing basis by Hermès International’s Treasury Management department. Finally, the Group breaks down investment transactions, currency risk hedging transactions and transactions involving deposits in selected banks wit- hin the defined limits of amount and maturity. Moreover, the impact of the credit risk as recommended by IFRS 13 in the fair value of derivatives is close to 0 for the Group, given that all of the derivatives have a maturity of less than 12 months. Description of the risk The Group is exposed to financial risks related to changes in tax regu- lations or their interpretation in the countries where it operates. Any change in tax regulations involving an increase in existing taxes and duties or the instauration of new taxes in particular in the area of tax rates, transfer pricing, dividends … could have a negative impact on the Group’s results. Risk management The Group provides regulatory oversight and defines its tax policy by relying on a team of tax experts under the supervision of the Executive Vice President Finance, assisted by external advisers if necessary. The Group is committed to respecting all the laws and regulations in each of the countries where it operates. It relies on transparent and simple orga- nisation. The Group’s tax policy is not based on any tax optimisation or evasion scheme and complies with the principles laid down by the OECD. In the case of a dispute or differences in interpretation, the Group may have to challenge reassessments with the tax authorities and to seek redress using the means available to it for its defence. Financial risks related to climate change Hermès believes that the financial risks to its business related to climate change are not currently significant (Article L. 225-100-1 of the French Commercial Code ( Code de commerce )). The Group is implementing a low carbon strategy and is applying a certain number of measures to reduce its energy consumption and emissions, from supplies, manufac- turing sites and its stores. In addition to these in-house efforts, Hermès has been implementing since 2012 a voluntary Group carbon offsetting scheme (Funds Livelihoods). 1.9.4.4 Financial risks related to changes in, complexity and interpretation of tax regulations 1.9.4.5

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Control of counterparty risk

1.9.4.3

Description of the risk As the Group has a positive cash flow and because of its other tran- sactions with banks (exchange rate hedging), the Group is exposed to counterparty risk that is mainly banking-related and is appropriately monitored.

2018 REGISTRATION DOCUMENT HERMÈS INTERNATIONAL

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