Alcoa 2010 Annual Report Download - page 153

Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well
as the loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The gain or
loss on the hedged items are included in the same line items as the loss or gain on the related derivative contracts as
follows (there were no contracts that ceased to qualify as a fair value hedge in 2010, 2009, or 2008):
Derivatives in Fair Value
Hedging Relationships
Location of Gain or (Loss)
Recognized in Earnings on Derivatives
Amount of Gain or (Loss)
Recognized in Earnings on Derivatives
2010 2009 2008
Aluminum contracts Sales $ 38 $ 214 $(539)
Interest rate contracts Interest expense 90 61 16
Foreign exchange contracts Other income, net - - (1)
Total $ 128 $ 275 $(524)
Hedged Items in Fair
Value Hedging
Relationships
Location of Gain or (Loss)
Recognized in Earnings on Hedged
Items
Amount of Gain or (Loss)
Recognized in Earnings on Hedged Items
2010 2009 2008
Aluminum contracts Sales $ (41) $(227) $ 542
Interest rate contracts Interest expense (90) (61) (16)
Foreign exchange contracts Other income, net - - 1
Total $(131) $(288) $ 527
Aluminum. Alcoa is a leading global producer of primary aluminum and fabricated aluminum products. As a
condition of sale, customers often require Alcoa to enter into long-term, fixed-price commitments. These commitments
expose Alcoa to the risk of fluctuating aluminum prices between the time the order is committed and the time that the
order is shipped. Alcoa’s aluminum commodity risk management policy is to manage, principally through the use of
futures and contracts, the aluminum price risk associated with a portion of its firm commitments. These contracts cover
known exposures, generally within three years. As of December 31, 2010, Alcoa had 259 kmt of aluminum futures
designated as fair value hedges. The effects of this hedging activity will be recognized over the designated hedge
periods in 2011 to 2012.
Interest Rates. Alcoa uses interest rate swaps to help maintain a strategic balance between fixed- and floating-rate
debt and to manage overall financing costs. As of December 31, 2010, the Company had pay floating, receive fixed
interest rate swaps that were designated as fair value hedges. These hedges effectively convert the interest rate from
fixed to floating on $1,065 of debt through 2018 (see Note K). In 2010, Alcoa terminated all or a portion of various
interest rate swaps with a notional amount of $825 in conjunction with the early retirement of the related debt (see Note
K). At the time of termination, the swaps were “in-the-money” resulting in a gain of $28, which was recorded in
Interest expense on the accompanying Statement of Consolidated Operations.
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.
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