Alcoa 1997 Annual Report Download - page 48

46
Q. Financial Instrum ents
Th e car r yin g valu es an d fa ir va lu es of Alcoa’s finan cia l in st r u m en t s
at Decem ber 31 follow.
1997
Carrying
value Fair value
19 9 6
Ca r r y in g
va lu e
Fa ir
va lu e
Ca sh a n d ca s h e qu iva le n t s $ 800.8 $ 800.8 $ 598.1 $ 598.1
Sh or t-ter m in vest m e nt s 105.6 105.6 18.5 18.5
No n cu r r e n t r e ce iva ble s 83.9 83.9 75.5 75.5
In ve s t m e n t s a va ila ble fo r s a le ——68.0 68.0
Sh or t-te r m deb t 494.9 494.9 385.0 385.0
Lon g- t e r m de b t 1,457.2 1,456.3 1,689.8 1,678.0
Th e m et h od s u s ed t o est im a te t h e fa ir va lue s of ce r t a in fin a ncia l
in st r u m e nt s follow.
Cash and Cash Equivalents, Short-Term Investm ents and Short-Term Debt.
Th e ca r r y in g a m ou n t s ap p rox im a te fa ir va lu e be cau s e of t h e sh or t
m at u r it y of t h e in st r u m en ts. All inve st m e nt s pu rch as ed w ith a
m at u rit y of th re e m onth s or les s are con s ide red ca sh equ iva lent s.
Noncurrent Receivables. Th e fa ir va lu e of n on cu r r en t rece ivable s is
b as ed on a n t icip at ed ca sh flow s a n d ap p rox im a te s ca r r yin g va lu e.
Investm ents Available for Sale. Th e fa ir va lu e of in ve st m e n t s is d et e r-
m in ed ba se d on read ily ava ilable m a rket va lu es. Invest m e nt s in
m a rket able e qu it y s ecu r it ie s a re cla s sifie d a s ‘‘ava ila ble for sa le’’ a n d
a r e ca r r ie d a t fa ir va lu e . In 1997, Alco a s old a ll o f it s m a r ket a ble e qu it y
se cu r it ies fo r $60, r esu lt in g in a ga in of $24.7, n et of $13.3 in t a xes.
Long-Term Debt. Th e fa ir va lu e is ba sed on in t er est rate s t h at a re
cu r rent ly ava ilable to Alcoa for issu ance of debt w it h sim ilar ter m s
an d rem a in ing m at u r it ies.
Alcoa h old s or pu rch a se s de r iva t ive fin an cia l in st r u m e nt s for
pu r p ose s ot h er t h a n t r ad in g. Det a ils of t h e s ign ifica n t in st r u m e n ts
follow.
Foreign Exchange Contracts. Th e com p any e nters in to foreign
exch a n ge con t ract s to h edge m ost of it s fir m an d an t icip ated
p u r ch a s e a n d s a le com m it m e n t s de n om in a te d in fo re ign cu r r e n c ie s
for p er iod s com m e n su rat e w it h it s kn ow n or exp ect ed exp osu r es.
Th e con tract s gen era lly m atu re w ith in 12 m on th s an d are p r in ci-
p ally u n secu r ed fore ign exch a n ge con t ract s w it h ca refu lly s ele ct ed
ba n ks. T he m a rket r isk exp osu r e is e ssen t ia lly lim ite d t o r isk
r ela te d t o cu r r en cy rat e m ove m e nt s. Un r ea lize d ga in s (los se s) on
th ese cont ract s at Decem b er 31, 1997 an d 1996 were $(84.9) an d
$34.8, r e sp e c t ive ly.
Th e t a ble b elow r efl ect s t h e va r iou s t y p e s of fo re ig n e xch a n ge
con t ract s Alcoa u ses to m a na ge it s foreign exch an ge r isk.
1997
Notional
am ount Market value
19 9 6
Not ion a l
a m ou n t
Ma r ket
va lu e
Fo r w a r d s $2,235.8 $(102.7) $2,579.5 $32.8
Pu rch a s e d op t io n s 232.5 (42.1) 649.9 5.6
Wr it t e n o p t ion s 202.1 40.3 390.8 (2.3)
Th e not ion al values su m m a r ized ea rlier p rovide a n indicat ion of th e
exte nt of t h e com p a n y’s in volve m e nt in su ch in st r u m e nt s bu t do n ot
repres en t its exp osu re to m a rket r isk. Alcoa u t ilizes w r itten opt ion s
m a in ly to offset or close ou t p u rch a sed opt ion s.
T h e t a ble b elow s u m m a r iz es b y m a jor cu r r en cy t h e con t r act u a l
a m ou n t s of Alco a’s fo r w a rd e xch a n ge a n d op t io n co n t r ac t s t r a n sla t ed
to U.S. d olla rs a t De ce m b er 31 rat es. T h e ‘‘bu y’’ a m ou n t s rep res en t
t h e U.S. d olla r e qu iva len t of com m it m e nt s t o pu rch a se fore ign
cu r r en cie s a n d t h e ‘‘s ell’’ a m ou n t s r ep r es en t t h e U.S. d olla r equ iva le nt
of com m it m e n t s t o s ell fo re ig n cu r r e n cie s.
1997
Buy Sell
19 9 6
Bu y Sell
Au st r alia n dolla r $1,492.0 $291.3 $1,858.7 $ 808.6
Dutch gu ilde r 111.9 18.1 198.8 18.7
Ja pa n e se ye n 68.2 12.1 93.7 25.2
De u t s ch e m a r k 36.5 151.2 63.5 226.0
Pou nd sterlin g 62.3 115.3 21.5 74.3
Ot h er 45.2 64.6 45.3 248.9
$1,816.1 $652.6 $2,281.5 $1,401.7
Interest Rate Swaps. Alcoa m a na ges it s debt p or t folio by u sin g in te rest
rate swaps a nd opt ion s to ach ieve a n overa ll desired posit ion of fixe d
a n d float in g r at es. As of De ce m b er 31, 1997, Alco a h a d ou t st a n din g
fou r in te rest rat e swap con t ra ct s m at u r in g in 2001 to conver t a
fix ed-r at e obliga t ion t o fl oat in g r at e s o n a n ot ion a l a m ou n t of $175.
In a dd it ion , Alco a Fu jiku r a h a d five ou t s t a n d in g in t er est r at e sw ap
con t r act s t o co nve r t a flo at in g-ra te obliga t ion t o a fi xe d r at e o n a
notionalamount of$238at year-end 1997.
Alcoa u t iliz es cr os s-cu r ren cy in te rest rat e swap s t o t ake a dva n-
tage of inter n at ion a l debt m arkets wh ile lim it in g foreign exch an ge
r isk. At yea r-en d 1997, Alcoa h ad in place foreign cu r ren cy for ward
co nt r ac t s t o effe ct ively co nve r t t h e p r in cip a l p ay m e n t du e in 1999 on
it s Y⫽7.5 billion loan to a U.S. dollar obligat ion on a n ot ional am ou nt
of $78. Alcoa a ls o h ad in place cr os s-cu r r en cy in te rest rat e sw ap s t h at
e ffe c t ive ly c on ve r t U.S. d olla r-d e n o m in a t e d d eb t in t o lia bilit ies in ye n
b as ed on Ja pa n es e in te rest rat es.
Based on cu r rent in te rest rates for sim ila r t ran sact ion s, t he fa ir
va lu e o f a ll in t e re st r at e sw ap a gr e em e n t s is n ot m a te r ia l .
Cred it an d m a rket r isk exp osu res are lim ited to th e n et interest
d iffer en t ia ls. T he n et p ay m e n ts o r rece ip ts fr om in te r est rat e swap s
ar e recorded as p ar t of interest expen se an d are n ot m ater ial. Th e
effect of in terest rate swap s on Alcoa’s com posite in te rest rate on
lon g-t er m d ebt w a s n ot m a te r ia l at t h e e n d o f 1997 or 1996.
Alcoa is exp os ed t o cr ed it los s in th e eve nt of n on pe r for m a nce by
cou nte r pa rt ies on th e above in st ru m en ts, bu t does n ot ant icip ate
n on p e r fo r m a n ce b y a n y o f t h e co u n t er p a r t ie s.
For fu rt h er infor m at ion on Alcoa’s h edging a nd der ivat ives
act ivit ies, s ee Note A.