Honda 2012 Annual Report Download - page 47

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Quantitative and Qualitative Disclosure
about Market Risk
Honda is exposed to market risks, which are changes in
foreign currency exchanges rates, in interest rates and in
prices of marketable equity securities. Honda is a party to
derivative financial instruments in the normal course of
business in order to manage risks associated with changes
in foreign currency exchange rates and in interest rates.
Honda does not hold any derivative financial instruments
for trading purposes.
Foreign Currency Exchange Rate Risk
Foreign currency forward exchange contracts and purchased
option contracts are used to hedge currency risk of sale
commitments denominated in foreign currencies (principally
U.S. dollars).
Foreign currency written option contracts are entered into
in combination with purchased option contracts to offset
premium amounts to be paid for purchased option contracts.
The tables below provide information about our derivatives
related to foreign currency exchange rate risk as of March 31,
2011 and 2012. For forward exchange contracts and cur-
rency options, the table presents the contract amounts and
fair value. All forward exchange contracts and currency con-
tracts to which we are a party have original maturities within
one year.
Foreign Exchange Risk
Fiscal year ended March 31 2011 2012
Yen (millions) Average
contractual
rate
Yen (millions) Average
contractual
rate
Contract
amount Fair value
Contract
amount Fair value
Forward Exchange Contracts
To sell US$ ¥285,212 (1,229) 82.77 ¥301,538 (10,554) 79.47
To sell EUR 34,183 (1,701) 111.63 18,895 (1,023) 103.83
To sell CA$ 19 (1) 83.44 63 (1) 81.09
To sell GBP 13,857 (253) 131.40 4,047 (19) 130.69
To sell other foreign currencies 58,330 (3,660) various 87,342 (6,040) various
To buy US$ 8,175 41 82.73 5,674 34 81.20
To buy other foreign currencies 3,046 65 various 4,346 109 various
Cross-currencies 223,587 (1,212) various 201,744 588 various
Total ¥626,409 (7,950) ¥623,649 (16,906)
Currency Option Contracts
Option purchased to sell US$ ¥ 14,746 144 various ¥ 27,216 —various
Option written to sell US$ 29,491 (108) various 51,874 (2,148) various
Total ¥ 44,237 36 ¥ 79,090 (2,148)
Interest Rate Risk
Honda is exposed to market risk for changes in interest rates
related primarily to its debt obligations and finance receivables.
In addition to short-term financing such as commercial paper,
Honda has long-term debt with both fixed and floating rates.
Our finance receivables are primarily fixed rate. Interest rate
swap agreements are mainly used to manage interest rate
risk exposure and to convert floating rate financing to fixed
rate financing (normally 3 to 5 years) in order to match financ-
ing costs with income from finance receivables. Foreign cur-
rency and interest rate swap agreements used among
different currencies, also serve to hedge foreign currency
exchange risk as well as interest rate risk.
The following tables provide information about Honda’s
financial instruments that were sensitive to changes in interest
rates at March 31, 2011 and 2012. For finance receivables
and long-term debt, these tables present principal cash
flows, fair value and related weighted average interest rates.
For interest rate swaps and currency and interest rate swaps,
the table presents notional amounts, fair value and weighted
average interest rates. Variable interest rates are determined
using formulas such as LIBOR+a and an index.
Honda Motor Co., Ltd. 45