Adidas 1997 Annual Report Download - page 47

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45
The actuarial valuations of the plans described herein are made at the end of each reporting
period. The actuarial valuations of the plan are dated December 10, 1997, December 11, 1997
and February 10, 1998.
Additionally, the Company sponsors and/or contributes to various other plans outside of Germany
which are not significant.
Pension expense totalled DM 28 million, DM 13 million and DM 14 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
14. Financial instruments The Company uses derivative financial instruments to reduce exposure to market risks resulting
from fluctuations in currency exchange and interest rates. The Company does not enter into
financial instruments for trading or speculative purposes.
Management of foreign exchange risk:
Currency management policies of the Group are established by a Treasury Committee which is
composed of members of the Company’s senior management. Currency risk is generally managed
from the Company’s headquarters at Herzogenaurach, Germany.
The Company is subject to currency exposure, primarily due to an imbalance caused by the high
share of product sourcing from suppliers in the Far East, which invoice in USD, and the majority
of sales being invoiced in European currencies.
It is the Company’s policy to hedge currency risks due to future operations when it becomes
exposed.
The Company uses forward contracts, primarily for the shorter maturities, and currency options
in the management of its currency risks.
Exchange gains and losses on forward contracts and currency options which hedge anticipated
future transactions are deferred, whereas exchange gains and losses on forward contracts and
currency options which were discontinued or no longer serve as a hedge for an anticipated future
transaction are credited/charged to current income as incurred.
To limit the premium payments for currency options, the Company applies, in its hedging via options,
a combination of the purchase of USD call options with the sale of USD put options with lower
strike rates. The Company’s portfolio of currency options is actively managed. In 1997, the Com-
pany incurred option premium payments in a total amount of DM 29.7 million, equal to approximately
1.7% of the total amount of purchases of USD against other currencies, or approximately 0.8%
of the cost of goods sold.
Of the currency hedges in the total amount of DM 1.7 billion, which were outstanding on Decem-
ber 31, 1997, DM 1.6 billion were for the purchase of USD. Of these, approximately DM 400 million
were for the purchase of USD versus DM, at an effective worst-case rate of 1.688. Since most of
the hedging is via options, the Company would benefit from a decline of the USD-DM rate in the
exchange markets below this level.
adidas-Salomon AG and Subsidiaries
Notes to Consolidated Financial Statements