Gazit-Globe Ltd | CIK:0001379009 |

Group’s global operations expose it to various financial risk factors such as market risk (including foreign exchange risk, CPI risk, interest risk and price risk), credit risk and liquidity risk. The Group’s comprehensive risk management strategy focuses on activities that reduce to a minimum any possible adverse effects on the Group’s financial performance.

The following is additional information about market risks and their management:

The Group operates in a large number of countries and therefore exposed to currency risks resulting from the exposure to the fluctuations of exchange rates in different currencies. Some of the Group companies’ transactions are performed in currencies other than their functional currency. The Group generally maintains a high correlation between the currency mix of the various properties (mainly the Euro, U.S. dollar, Canadian dollar and Brazilian real) and the currency exposure of its equity to the same currencies, this by entering, from time to time, into hedge transaction and management of the currency exposure. For details refer to section c. below.

The Group has loans from banks and issued debentures linked to changes in the Consumer Price Index (“CPI”) in Israel. For the sum of financial instruments linked to the CPI and for cross currency swap transactions, with respect to which the Group is exposed to changes in the CPI, refer to sections c and e below.

Liabilities that bear floating interest rate expose the Group to cash flow risk and liabilities that bear fix interest rate expose the Group to interest rate risk in respect of fair value. As part of the risk management strategy, the Group maintains certain composition of exposure to fix interest to exposure to floating interest. From time to time and according to market conditions, the Group enters into interest rate swaps in which they exchange variable interest with fixed interest and, vice-versa, to hedge their liabilities against changes in market interest rate (refer to section c below). As of the reporting date, 83.1% of the Group’s liabilities (82.4% excluding interest rate swaps) bear fixed interest (as of December 31, 2016 - 85.9%, 83.7% excluding interest rate swaps). For additional details regarding interest rates and the maturity dates, refer also to Notes 19 to 21.

The Group has investments in marketable financial instruments traded on stock exchanges and non-traded instruments, including shares, participation certificates in mutual funds and debentures, which are classified either as financial assets measured at fair value through profit or loss and as financial assets available for sale, with respect to which the Group is exposed to risk resulting from fluctuations in security prices which are determined by market prices on stock exchanges. The carrying amount of such investments as of December 31, 2017 is NIS 4,561 million (December 31, 2016 - NIS  212 million). from time to time, as part of the group risk management strategy, the group considers entering into hedging transactions to reduce exposure to flunctuations in the exchange of foreign currencies.

As of reporting date, the Group has an exposure of NIS 4,432 million resulting from an investment in marketable shares that is accounted for as an investment available for sale and measured at fair value. A decrease of 5% or 10% in the share price could have an effect of NIS 222 million or NIS 443 million, respectively, on the pre-tax equity. An increase of 5% or 10% in the value of the marketable shares could have an effect of NIS 222 million or NIS 443 million, respectively, on the pre-tax equity. In accordance with International Financial Reporting Standard No. 9, “Financial Instruments”, which will be implemented commencing on January 1, 2018, changes in fair value, are to be carried to profit or loss.

The financial strength of the Group’s customers has an effect on its results. The Group is not exposed to significant concentration of credit risks. The Group regularly evaluates the quality of the customers and the scope of credit extended to its customers. Accordingly, the Group provides for an allowance of doubtful debts based on the credit risk in respect of certain customers.

Cash and deposits are deposited with major financial institutions. Company management estimates that the risk that such parties will fail to meet their obligations is remote as they are financially sound.

The Group’s policy is to maintain a certain balance between long-term financing, among others mortgages, bank loans and debentures to use of revolving lines of credit for periods 3 to 4 years, in which the Group can utilize credit for different periods.

As of December 31, 2017, the Group has a working capital deficiency of NIS 0.6 billion. The Group has unused approved credit facilities in the amount of NIS 10.2 billion that can be used over the coming year. The Company’s management believes that these sources, as well as the positive cash flow generated from operating activities, will allow each of the Group’s companies to repay their current liabilities when due.

In connection with cross-currency swap transactions of liabilities (see section c below), with respect to part of the swaps, the Company entered into credit support annexes agreements (“CSA”) of current settlement mechanisms with respect to the fair value of the transactions. Accordingly, the Company may be required to transfer the bank significant amounts from time to time depends on the fair value of these transactions.

For additional details regarding the maturity dates of the Group’s financial liabilities, see section d below.

The following table presents the carrying amount and fair value of groups of financial instruments that are measured in the financial statements not at fair value:

Fair value determination of financial instruments:

The carrying amount of the financial instruments that are classified as current assets and current liabilities approximate their fair value.

The fair value of financial instruments that are quoted in an active market (such as marketable securities, debentures, convertible debentures) were calculated based on quoted market closing prices on the reporting date (level 1 on the fair values hierarchy). As of December 31, 2017, the Fair value of debentures in total amount of NIS 3.7 billion, that are not quoted in an active market or that are traded in an illiquid market, was evaluated in valuation method (level 2 on the fair value hierarchy) as described below (as of December 31, 2016: approximately NIS 10.7 billion).

The fair value of loans bearing variable interest approximates their nominal value.

The fair value of debt instruments that are not quoted in an active market or that are traded in an illiquid market is determined using standard pricing valuation models primarily DCF which considers the present value of future cash flows discounted at the interest rate, which according to Company’s management and external valuators estimates reflects market conditions including the parties’ credit risk on the reporting date.

As of December 31, 2017 the interest rate range for unquoted debt instruments that were classified at level 3 in the fair value hierarchy is 5%.

The fair value of forward contracts with respect to foreign currency is calculated taking into account the future rates quoted for contracts having the same settlement dates and in addition the amounts are discounted with relevant interest and the value is adjusted to the credit risk of the counter party (level 2 on the Fair Value hierarchy).

The fair value of interest rate swap contracts and cross-currency swap contracts that include a principle and interest are determined by discounting the anticipated cash flows from the transaction by the applicable yield curve, with adjustments for inter-currency liquidity gaps (CBS), inflation expectations and the credit risk of the parties (level 2 on the Fair Value hierarchy).

The balance represent the participation certificates in private equity funds, for additional information refer to note 10.

During 2017, there were no transfers with respect to fair value measurement of any financial instrument between Level 1 and Level 2, and there were no transfers to or from Level 3 with respect to fair value measurement of any financial instrument.

The following table present information about cross-currency swaps, interest rate swaps, forward contracts and purchase options:

Fair value of financial derivatives is presented in the statement of financial position within the following categories:

Below is the fair value of derivatives designated for hedge accounting included in the above table:

The table below presents the maturity schedule of the Group’s financial liabilities based on contractual undiscounted payments (including interest payments):

December 31, 2017

December 31, 2016

As of the reporting date, the Company has NIS 4,758 million of cross-currency swaps from NIS linked to Israeli CPI to foreign currency and NIS 2,249 million from non-linked NIS to foreign currency.

Sensitivity analysis and main assumptions

The Company has performed sensitivity tests of principal market risk factors that are liable to affect its reported operating results or financial position. The sensitivity analysis presents the gain or loss or change in equity (before tax) in respect of each financial instrument for the relevant risk variable chosen for that instrument as of each reporting date. The examination of risk factors and the financial assets and liabilities were determined based on the materiality of the exposure in relation to each risk assuming that all the other variables remain constant. The sensitivity analysis refers to a potential increase in the relevant variables at rates that the Company deemed appropriate, as the case may be. The same is true for a decrease in same percentage which would impact profit or loss by the same amounts in the opposite direction, unless otherwise indicated.

In addition:

Changes in liabilities from financing activities:

Following is reconciliation between the opening balance and closing balance of liabilities for which the cash flows due to them classified or will classified as cash flows from financing activities: