Cemex 2009 Annual Report Download - page 63

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The estimated fair value of derivative instruments fluctuates over time and is determined by measuring the effect of future relevant economic variables
according to the yield curves shown in the market as of the balance sheet date. These values should be analyzed in relation to the fair values of the
underlying transactions and as part of CEMEX’s overall exposure attributable to fluctuations in interest rates and foreign exchange rates. The notional
amounts of derivative instruments do not necessarily represent amounts exchanged by the parties, and consequently, there is no direct measure of
CEMEX’s exposure to the use of these derivatives. The amounts exchanged are determined based on the basis of the notional amounts and other terms
included in the derivative instruments.
During October 2008, many companies experienced a period of greater volatility in the global securities and exchange markets, as part of the further
worsening financial institutions’ crisis. The crisis affected the availability of financing and companies’ perceived risks, resulting from expectations of
entering into an extended economic recession. Particularly in Mexico, during the period from October 1 to 16, 2008, the peso depreciated against the dollar
by approximately 19%, representing two thirds of the total depreciation of the peso vis-à-vis the dollar during the full year 2008, which was approximately
26%. Meanwhile, the price of CEMEX’s CPO decreased 58% in that same period. These two factors had a significant negative effect on the valuation of
CEMEX’s derivative instruments portfolio, particularily the valuation of foreign exchange forward contracts that hedged CEMEX’s net investment in foreign
subsidiaries and cross currency swaps related to debt, as well as forward contracts in CEMEX’s CPOs, among others. In the aforementioned period,
changes in the fair value of the derivative instruments portfolio represented losses of approximately US$976 ($13,410), which affected the availability
of CEMEX’s lines of credit and triggered the need to make deposits in margin accounts with the counterparties. These deposits in margin accounts as of
October 31, 2008 amounted to approximately US$750 ($10,305), negatively affecting CEMEX’s liquidity. In light of an uncertain economic outlook and the
expectation of further worsening of the economic variables, CEMEX decided to neutralize all of its derivative instruments positions that were sensitive to
fluctuations of the exchange rate of the peso vis-à-vis foreign currencies and the price of its shares.
In order to close those positions and considering contractual limitations to settle the contracts before their maturity date, in October 2008, CEMEX entered
into new derivative instruments with the same counterparties, which represented the opposite position to the exposure resulting from fluctuations of
the economic variables included in the original derivative instruments. As a result, from the date of the negotiation of the new opposite positions,
any changes in the fair value of the original instruments is effectively offset by an equivalent inverse amount generated by the new positions. Since
December 31, 2008, CEMEX has designated the derivative instruments portfolio in which CEMEX is still exposed to changes in fair value as “Active
derivative financial instruments.” In addition, CEMEX has designated the portfolio of original and opposite derivative positions as “Inactive derivative
financial instruments.”
As of December 31, 2009 and 2008, the balance of deposits in margin accounts with financial institutions that guarantee CEMEX’s obligations through
derivative financial instruments amounted to US$195 ($2,553) and US$570 ($7,832), respectively. In 2008, US$372 ($5,111) were related to active positions
and US$198 ($2,720) to inactive positions. Pursuant to net balance settlement agreements included in the derivative instrument contracts, the deposits in
margin accounts have been offset within CEMEX’s liabilities with the counterparties.
During April 2009, in connection with the CWEA, CEMEX completed the settlement of a significant portion of its active and inactive derivative financial
instruments held as of December 31, 2008 (notes 13C and D) in order to reduce the risk of further margin calls. By means of this settlement, CEMEX fixed an
aggregate loss of approximately US$1,093, which after netting US$624 of cash margin deposits already posted in favor of CEMEX’s counterparties and cash
payments of approximately US$48, was documented through promissory notes for approximately US$421, which increased CEMEX’s outstanding debt.
Previously, in February 2009, CEMEX and its counterparties agreed the settlement of a portion of the obligations incurred through derivative instruments.
The counterparties permanently withdrew part of the amounts deposited in such margin accounts for an amount of approximately US$392, of which
approximately US$102 referred to active positions and approximately US$290 referred to inactive positions.
In connection with the portfolio of derivative instruments as of December 31, 2009, the main exposure of CEMEX is related to the prices of the CPOs and
the third party shares. A significant decrease in the market price of CEMEX’s CPOs and the third party shares would negatively affect CEMEX’s liquidity and
financial position. The following table presents CEMEX’s derivative instruments outstanding as of December 31, 2009 and 2008.
2009 2008
Notional Notional
(U.S. dollars millions) amount Fair value amount Fair value
Active derivative financial instruments 1 US$ 1,171 3 21,173 185
Inactive derivative financial instruments 1, 2 – – – (385)
US$ 1,171 3 21,173 (200)
1 As of December 31, 2009 and 2008, the fair value of derivative instruments is presented net of cash deposits in margin accounts.
2 Notional amounts of the original derivative positions and the opposite derivative positions were not aggregated, considering that the effects of one instrument is
proportionally inverse to the effect of the other instrument, and therefore, eliminated.
For the years ended December 31, 2009 and 2008, the caption “Results from financial instruments” includes the losses related to the recognition of changes
in fair values of the derivative instruments portfolio during the period, for both active and inactive positions.
13C) Active derivative financial instruments
As of December 31, 2009 and 2008, the notional amounts, the fair values and the characteristics of these derivative instruments were as follows:
2009 2008
Notional Notional
(U.S. dollars millions) amount Fair value amount Fair value
I. Interest rate swaps US$ 202 27 15,527 36
II. Cross currency swaps – – 528 (57)
III. Foreign exchange forward contracts – – 940 (2)
IV. Equity forwards on third party shares 54 54 258 (12)
V. Forward instruments over indexes 55 1 40 (5)
VI. Options on CEMEX’s own shares 860 (79) 860 (41)
VII. Derivative instruments related to perpetual debentures – – 3,020 266
US$ 1,171 3 21,173 185