Cemex 2009 Annual Report Download - page 65

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63
III. Foreign exchange forward contracts
All outstanding foreign exchange forward contracts as of December 31, 2008 were settled in April 2009 (note 13B). As of December 31, 2008, a summary
of these derivative instruments was as follows:
2008
Notional Fair
(U.S. dollars millions) amount value
Exchange from pesos to dollars 1 US$ 240 (12)
Exchange from pounds sterling to dollars 1 75 1
Exchange from Japanese yen to dollars 1 254 82
Other currency instruments 2 371 (73)
US$ 940 (2)
1 Derivative instruments related to changing the mix of currencies originally negotiated over a portion of CEMEX’s debt. Changes in the fair value of these contracts were
recognized in the income statement.
2 Changes in the fair value of these contracts were recognized in the income statement since they were not designated as cash flow hedges or hedges of CEMEX’s net
investment in foreign subsidiaries.
Until October 2008, in order to hedge financial risks associated with fluctuations in foreign exchange rates of certain net investments in foreign countries
denominated in euros and dollars to the peso, and consequently, reducing volatility in the value of stockholders’ equity in CEMEX’s reporting currency,
CEMEX negotiated foreign exchange forward contracts with different maturities until 2010. Changes in the estimated fair value of these instruments were
recorded in stockholders’ equity as part of the foreign currency translation effect. In October 2008, in connection with the closing process of positions
exposed to fluctuations in exchange rates to the peso previously described, CEMEX entered into foreign exchange forward contracts with opposite exposure
to the original contracts. As a result of these new positions, changes in the fair value of the original instruments were offset by an equivalent inverse
amount generated by these new derivative positions. The designation of the original positions as hedges of CEMEX’s net exposure on investments in
foreign subsidiaries in stockholders’ equity terminated with the negotiation of the new opposite derivative positions in October 2008. Therefore, changes
in fair value of original positions and new opposite derivative positions were recognized prospectively in the income statement within inactive derivative
financial instruments (note 13D). Valuation effects were recognized within comprehensive income until the hedge designation was revoked, adjusting the
cumulative effect for translation of foreign subsidiaries.
Between April and August 2007, in connection with the acquisition of Rinker, CEMEX negotiated foreign exchange forward contracts in order to hedge the
variability in a portion of the cash flows associated with exchange fluctuations between the Australian dollar and the U.S. dollar, the currency in which
CEMEX obtained financing. The notional amount of these contracts reached approximately US$5,663 in June 2007. As a result of changes in the fair value
of these contracts, upon settlement, CEMEX realized a gain of approximately US$137 ($1,496), which was recognized in the results of the period in 2007.
IV. Equity forwards in third party shares
In connection with the sale of shares of AXTEL (note 10A) and in order to maintain the exposure to changes in the price of such entity, on March 31, 2008,
CEMEX entered into a forward contract to be settled in cash over the price of 119 million CPOs of AXTEL (59.5 million CPOs with each counterparty) which
originally was set to mature in April 2011. In 2008, fair value included deposits in margin accounts for US$184 ($2,528), which were presented net within
liabilities, as a result of net settlement agreements with the counterparties.
During 2009, in order to restate the exercise price included in the contracts, CEMEX instructed the counterparties to definitively dispose of the deposits in
margin accounts for approximately $207, and the contracts were renewed until October 2009. Each of the counterparties exercised an option to maintain
the contracts over 59.5 million CPOs of AXTEL until October 2011. Changes in the fair value of these instruments generated a gain of approximately US$32
($435) in 2009 and a loss of approximately US$196 ($2,197) in 2008.
V. Forward instruments over indexes
During 2008, CEMEX negotiated forward derivative instruments over the TRI (Total Return Index) of the Mexican Stock Exchange, maturing in October
2009 through which CEMEX maintained exposure to increases or decreases of such index. TRI expresses the market return on stocks based on market
capitalization of the issuers comprising the index. At their maturity in 2009, these derivative instruments were renegotiated until October 2010. Changes in
the fair value of these instruments generated a gain of approximately US$18 ($245) in 2009 and a loss of approximately US$32 ($359) in 2008.
VI. Options in CEMEX’s own shares
In June 2008, CEMEX entered into a structured transaction of US$500 ($6,870) paying an interest coupon of LIBOR plus 132.5 bps, which includes options
based on the price of CEMEX’s ADS for a notional amount of US$500, pursuant to which if the ADS price exceeds US$32, the net interest rate of this debt
would be zero. This rate increases as the price of the ADS decreases, with a maximum rate of 12% when the price per ADS is below US$23. CEMEX values
the options based on the price of its ADS at fair value, recognizing gains and losses in the income statement. As of December 31, 2009 and 2008, the fair
value included deposits in margin accounts of approximately US$54 ($707) and US$69 ($948), respectively, which were offset within CEMEX’s liabilities as
a result of a net settlement agreement with the counterparty.
In April 2008, Citibank entered into put option transactions on CEMEX’s CPOs with a Mexican trust that CEMEX established on behalf of its Mexican pension
fund and certain of CEMEX’s directors and current and former employees, as described in note 20C. CEMEX granted a guarantee over this transaction for a
notional amount of approximately US$360 in both 2009 and 2008. As of December 31, 2009 and 2008, the fair value of such guarantee, net of deposits in
margin accounts, represented a liability of approximately US$2 ($26) and an asset of approximately US$3 ($41), respectively. Changes in the fair value of
the guarantee were recognized in the income statement within “Results from financial instruments,” representing a gain of approximately US$51 ($694) in
2009 and a loss of approximately US$190 ($2,130) in 2008. As of December 31, 2009 and 2008, based on the guarantee, CEMEX was required to deposit in
margin accounts approximately US$141 ($1,846) and US$193 ($2,652), respectively, which according to the agreements with the counterparty were offset
with the obligation.
In October 2008, in connection with an early settlement of forward contracts over approximately 81 million CPOs arising as a result of the significant
decrease in the prices of the CPOs, CEMEX realized a loss of approximately US$152 ($2,102), which was recognized in the results for the period.