Air Canada 2008 Annual Report Download - page 133

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Consolidated Financial Statements and Notes
133
Collateral Held in Leasing Arrangements
The Corporation holds security deposits with a carrying value of $18 (2007 - $15), which approximates fair value, as security
for certain aircraft leased and sub-leased to third parties. These deposits do not pay interest to the lessee or sub-lessee. Of
these deposits, $11 (2007 - $4) has been assigned as collateral to secure the Corporation’s obligations to the lessors and
financiers of the aircraft, with the remaining cash held by Air Canada being unrestricted during the term of the lease. Any
collateral held by the Corporation is returned to the lessee or sub-lessee, as the case may be, at the end of the lease or sub-
lease term provided there have been no events of default under the leases or sub-leases.
Summary of Gain on Financial Instruments Recorded at Fair Value
2008 2007
Ineffective portion of fuel hedges $ 83 $ (12)
Fuel derivatives not under hedge accounting (9) 26
Cross currency interest rate swaps 4 -
Other 14 12
Gain on financial instruments recorded at fair value (1) $ 92 $ 26
(1) See Fuel Price Risk for a discussion of losses on fuel derivatives recorded in Other comprehensive income (“OCI”).
RiskManagement
Under its risk management policy, the Corporation manages its interest rate risk, foreign exchange risk, and market risk
through the use of various interest rate, foreign exchange, and fuel derivative financial instruments. The Corporation uses
derivative financial instruments only for risk management purposes, not for generating trading profit.
As noted below, the Corporation engages in derivative hedging to mitigate various risks. The derivative fair values represent
the amount of the consideration that could be exchanged in an arm’s length transaction between willing parties who are
under no compulsion to act. Fair value of these derivatives is determined using active markets, where available. When
no such market is available, valuation techniques are applied such as discounted cash flow analysis. Where practical, the
valuation technique incorporates all factors that would be considered in setting a price.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market interest rates.
The Corporation enters into both fixed and floating rate debt and also leases certain assets where the rental amount
fluctuates based on changes in short term interest rates. The Corporation manages interest rate risk on a portfolio basis
and seeks financing terms in individual arrangements that are most advantageous taking into account all relevant factors,
including credit margin, term and basis. The risk management objective is to minimize the potential for changes in interest
rates to cause adverse changes in cash flows to the Corporation. The temporary investment portfolio which earns a floating
rate of return is an economic hedge for a portion of the floating rate debt.
The ratio of fixed to floating rate debt outstanding is designed to maintain flexibility in the Corporation’s capital structure
and is based upon a long term objective of 60% fixed and 40% floating. The ratio at December 31, 2008 is 58% fixed and
42% floating, including the effects of interest rate swap positions.