Chrysler 2007 Annual Report Download - page 149

148 Fiat Group Consolidated Financial Statements at December 31, 2007 - Notes
At December 31, 2006, the item Other derivative instruments included for 1,282 million euros the notional amount of call options
on General Motors common stock purchased in 2004 in order to hedge the risk implicit in the Convertible Bond still outstanding at
that time (the residual debt of the Exchangeable bond linked to GM ordinary shares). These options expired unexercised in January
2007, at the same time as the total extinguishment of the Exchangeable loan.
Cash flow hedges
The economic effects mainly refer to the management of the currency risk and, to a lesser extent, to the hedges relating to the debt
of the Group’s financial companies.
The policy of the Group for managing currency risk normally requires that future cash flows from trading activities which will occur
for accounting purposes within the following twelve months, and from orders acquired (or contracts in progress), whatever their
due dates, to be hedged. As a result, it is considered reasonable to suppose that the hedging effect arising from this and recorded
in the cash flow hedge reserve will be recognised in income, almost entirely during the following year.
With reference to the interest rate and currency derivatives entered by the North American treasury for the purpose of hedging the
bond issue expiring in 2017, and treated as cash flow hedges, the amount recorded in the cash flow hedge reserve will be
recognised in income accordingly to the timing of the flows of the underlying bond.
Where a derivative financial instrument is designated as a hedge of the exposure to variability in cash flows of a recognised asset
or liability or a highly probable forecasted transaction and could affect income statement, the effective portion of any gain or loss
on the derivative financial instrument is recognised directly in equity. The cumulative gain or loss is removed from equity and
recognised in the profit and loss account at the same time as the economic effect arising from the hedged item affects income. The
gain or loss associated with a hedge or part of a hedge that has become ineffective is recognised in the income statement
immediately. When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur,
the cumulative gain or loss realised to the point of termination remains in stockholders’ equity and is recognised at the same time
as the related transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss held in
stockholders’ equity is recognised in the income statement immediately.
In 2007 the Group transferred to income gains of 187 million euros (gains of 6 million euros in 2006) net of tax effect previously
recognised directly in equity presented in the following line items:
(in millions of euros) 2007 2006
Currency risk
- Increase in Net revenues 144 21
- Decrease/(Increase) in Cost of sales 35 (33)
- Financial income (expenses) 33 –
- Result from investments (4) 6
Interest rate risk
- Result from investments 14 –
- Financial income (expenses) –1
Taxes income (expenses) (35) 11
Total recognised in the income statement 187 6
The ineffectiveness of cash flow hedges was not material for the years 2007 and 2006.