D-Link 2004 Annual Report Download - page 57

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29
D-LINK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(ii) Forward foreign currency exchange contracts
As of December 31, 2003 and 2004, the notional principal of outstanding forward
foreign currency exchange contracts entered into was US$43,807 thousand and
US$93,779 thousand, respectively. The details of the above forward foreign currency
exchange contracts’ balance as of December 31, 2003 and 2004, were as follows:
December 31,
2003 2004
Forward foreign currency exchange contract receivable $ 1,488,890 3,022,903
Forward foreign currency exchange contract payables (1,486,459) (2,957,007)
Discount on forward foreign currency exchange contract - 1,871
Forward foreign currency exchange contract receivables $ 2,431 67,767
Fair value $ (125) 64,767
(b) Fair value and risk
(i) Credit risk
Credit risk represents the accounting loss that would be recognized at the reporting date
if counter-parties failed to perform as contracted. Credit risk will increase as the
derivative instruments become more profitable. D-Link and subsidiaries entered into the
above derivative contracts with reputable financial institutions. The likelihood of
default on the part of the counter-parties is considered remote.
(ii) Market price risk
Market price risk represents the accounting loss that would be recognized at the
reporting date for the derivative financial instruments due to the changes in market
interest rates or foreign exchange rates. As D-Link and subsidiaries’ derivative financial
instruments are for hedging purposes, the gains or losses due to changes in the interest
rates or foreign exchange rates will be naturally offset by the hedged items. As a result,
market price risk is considered low.
(iii) Liquidity risk
Liquidity risk is the risk of being unable to settle derivative contracts on schedule. The
purpose of these instruments held by D-Link, DTI and Alpha was to manage and hedge
the changes and risks associated with foreign currency exchange rates. There is no
significant liquidity risk for the related cash flows.