Alcoa 2009 Annual Report Download - page 148

Foreign Exchange. Through April 2008, Alcoa used cross-currency interest rate swaps that effectively converted its
U.S. dollar denominated debt into Brazilian real debt at local interest rates.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss
on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative
representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized in current earnings.
Derivatives in Cash
Flow Hedging
Relationships
Amount of Gain or
(Loss) Recognized in
OCI on Derivatives
(Effective Portion)
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)*
Location of Gain
or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount Excluded
from Effectiveness
Testing)
Amount of Gain or
(Loss) Recognized
in Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)**
2009 2008 2007 2009 2008 2007 2009 2008 2007
Aluminum
contracts $(589) $232 $(148) Sales $ (4) $(136) $(31) Other income, net $3 $(2) $–
Aluminum
contracts 13 90 86 Other income, net 49 (35) 69 Other income, net – – –
Energy contracts (29) (41) (25) Cost of goods sold (37) (16) (72) Other income, net – – –
Foreign exchange
contracts (2) 1 17 Sales 3 46 65 Other income, net – – –
Foreign exchange
contracts – – 1 Cost of goods sold – (16) (22) Other income, net – – –
Interest rate
contracts (2) – – Cost of goods sold – – – Other income, net – – –
Total $(609) $282 $ (69) $ 11 $(157) $ 9 $3 $(2) $–
* Assuming market rates remain constant with the rates at December 31, 2009, a loss of $47 is expected to be
recognized in earnings over the next 12 months.
**In 2009, 2008, and 2007, the amount of gain or (loss) recognized in income represents $3, $(1), and $1, respectively,
related to the ineffective portion of the hedging relationships. There was also (1) related to the amount excluded
from the assessment of hedge effectiveness in both 2008 and 2007.
Aluminum and Energy. Alcoa anticipates the continued requirement to purchase aluminum and other commodities,
such as electricity, natural gas, and fuel oil, for its operations. Alcoa enters into futures and forward contracts to reduce
volatility in the price of these commodities. Alcoa has also entered into power supply and other contracts that contain
pricing provisions related to the LME aluminum price. The LME-linked pricing features are considered embedded
derivatives. A majority of these embedded derivatives have been designated as cash flow hedges of future sales of
aluminum. On March 31, 2009, Alcoa acquired an embedded derivative in a power contract, which is linked to the
LME, in the Elkem transaction.
Interest Rates. Alcoa had no outstanding cash flow hedges of interest rate exposures as of December 31, 2009, 2008,
or 2007. An investment accounted for on the equity method by Alcoa has entered into interest rate contracts, which are
designated as cash flow hedges.
Foreign Exchange. Alcoa is subject to exposure from fluctuations in foreign currency exchange rates. These contracts
may be used from time to time to hedge the variability in cash flows from the forecasted payment or receipt of
140