DuPont 2005 Annual Report Download - page 109

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E. I. du Pont de Nemours and Company
Notes to Consolidated Financial Statements (continued)
(Dollars in millions, except per share)
Hedges of Net Investment in a Foreign Operation
During the year ended December 31, 2005, the company has not maintained any hedges of net investment in a foreign
operation.
Derivatives not Designated in Hedging Relationships
The company uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denomi-
nated monetary assets and liabilities. The netting of such exposures precludes the use of hedge accounting. However, the
required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities
results in a minimal earnings impact, after taxes. Several small equity affiliates have risk management programs, mainly in the
area of foreign currency exposure, for which they have elected not to pursue hedge accounting. In addition, the company
maintains a few small risk management programs for agricultural commodities that do not qualify for hedge accounting
treatment.
In 2003, in conjunction with the acquisition of the 23.88 percent minority interest in DuPont Canada (see Note 27), the company
entered into option contracts to purchase 1.0 billion Canadian dollars for about $700, in order to protect against adverse
movements in the USD/Canadian dollar exchange rate. The changes in fair values of these contracts were included in income
in the period the change occurred. The contracts expired during the second quarter 2003 resulting in a pretax exchange gain
of $30.
Currency Risk
The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to monetary assets
and liabilities of its operations that are denominated in currencies other than the designated functional currency. The primary
business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that
exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized.
From time to time, the company will enter into forward exchange contracts to establish with certainty the functional currency
amount of future firm commitments denominated in another currency. Decisions regarding whether or not to hedge a given
commitment are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market
volatility, and economic trends. Forward exchange contracts are also used from time to time to manage near-term foreign
currency cash requirements and to place foreign currency deposits and marketable securities investments.
Interest Rate Risk
The company primarily uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related overall
cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest payments that are fully integrated with underlying
fixed-rate bonds or notes to effectively convert fixed rate debt into floating rate debt based on three- or six-month USD LIBOR.
At December 31, 2005, the company had entered into interest rate swap agreements with total notional amounts of approxi-
mately $2,900, whereby the company, over the remaining terms of the underlying notes, will receive a fixed rate payment
equivalent to the fixed interest rate of the underlying note and pay a floating rate of interest that is based on three- or
six-month USD LIBOR.
Interest rate swaps did not have a material effect on the company’s overall cost of borrowing at December 31, 2005 and 2004.
See Note 21 for additional descriptions of interest rate swaps.
F-50