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Treasury activities

Treasury activity is managed centrally, from the parent company's London, New York and Hong Kong offices, and is principally concerned with the monitoring of working capital, managing external and internal funding requirements and the monitoring and management of financial market risks, in particular interest rate and foreign exchange exposures.

The treasury operation is not a profit centre and its activities are carried out in accordance with policies approved by the Board of directors and subject to regular review and audit.

The Group's interest rate management policy recognises that fixing rates on all its debt eliminates the possibility of benefiting from rate reductions and similarly, having all its debt at floating rates unduly exposes the Group to increases in rates.

Its principal borrowing currencies are US dollars, pounds sterling and euros. Borrowings in these currencies represented 96.27% of the Group's gross indebtedness at 31 December 2007 (at $1,811 million, £614 million and €1,048 million) and 97.29% of the Group's average gross debt during the course of 2007 (at $1,859 million, £357 million and €1,152 million). Including the effect of interest rate and cross-currency swaps, 57.90% of the year-end US dollar net debt is at fixed rates averaging 5.64% for an average period of 103 months; and 65.18% of the sterling net debt is at a fixed rate of 6.19% for an average period of 135 months; and 21.44% of the euro net debt is at fixed rates averaging 7.39% for an average period of 51 months.

Other than fixed rate debt, the Group's other fixed rates are achieved principally through interest rate swaps with the Group's bankers. The Group also uses forward rate agreements and interest rate caps to manage exposure to interest rate changes. At 31 December 2007 no forward rate agreements or interest rate caps were in place.

These interest rate derivatives are used only to hedge exposures to interest rate movements arising from the Group's borrowings and surplus cash balances arising from its commercial activities and are not traded independently. Payments made under these instruments are accounted for on an accruals basis.

Three new financings were completed during the year. A £400 million 6% 10-year bond was issued in April 2007. The proceeds were used to part repay the £450 million 2% convertible bond which matured in April. In November 2007 a €500 million 5.25% eight-year bond was issued and a £200 million 6.375% 13-year bond was issued at the same time.

A $450 million bridging facility was put in place in June 2007 in connection with the acquisition of 24/7 RealMedia, Inc. and terminated in December 2007.

The Company has been actively lengthening the profile of its debt maturities as can be seen from the analysis of the debt maturity in the How we're doing - Financial performance charts section. This shows that during 2008 the €650 million 6% bond and the US$100 million 6.875% bond are due to mature, with the next significant maturity being in 2013. The fall out from the subprime crisis has resulted in difficulties from the credit markets generally, however WPP is taking steps to ensure it is in a position to meet these maturities.

The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of peak net-borrowing levels and debt maturities are closely monitored.

Targets for average net debt are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Group's major operations.

The Group's significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or 'functional') currencies of its main operating units. The majority of the Group's debt is therefore denominated in US dollars and euros, as these are the predominant currencies of revenues.

The Group's operations conduct the majority of their activities in their own local currency and consequently the Group has no significant transactional foreign exchange exposures. Any significant cross-border trading exposures are hedged by the use of forward foreign-exchange contracts. There were no such material contracts in place at 31 December 2007. No speculative foreign exchange trading is undertaken.