INTL FCStone 2005 Annual Report Download - page 62

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INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements—(Continued)
September 30, 2005 and 2004
Listed below is the fair value of trading-related derivatives as of September 30, 2005 and September 30,
2004. Assets represent net unrealized gains and liabilities represent net unrealized losses.
September 30,
2005
September 30,
2005
September 30,
2004
September 30,
2004
Assets Liabilities Assets Liabilities
Interest Rate Derivatives ........................ $ 29,525 $ — $ — $ 984
Foreign Exchange Derivates ..................... 17,127 48,822 3,350
Commodity Price Derivatives .................... 3,291,729 3,181,690 1,713,230 1,515,557
Total ....................................... $3,338,381 $3,181,690 $1,762,052 $1,519,891
Options and futures contracts held by the Company result from its customer market-making and proprietary
trading activities in the foreign exchange/commodities trading business segment. The Company assists its
commodities clients to protect the value of their future production (precious or base metals) by selling them put
options on an OTC basis. The Company also provides its commodities clients with sophisticated option products,
including combinations of buying and selling puts and calls. The Company mitigates its risk by effecting
offsetting OTC options with market counterparties or through the purchase or sale of commodities futures traded
through the COMEX division of the New York Mercantile Exchange or the London Metal Exchange (LME). The
risk mitigation of offsetting options is not within the documented hedging designation requirements of SFAS
No. 133.
These derivative contracts are traded along with cash transactions because of the integrated nature of the
markets for such products. The Company manages the risks associated with derivatives on an aggregate basis
along with the risks associated with its proprietary trading and market-making activities in cash instruments as
part of its firm-wide risk management policies.
In the normal course of business, the Company purchases and sells financial instruments and foreign
currency as either principal or agent on behalf of its customers. If either the customer or counterparty fails to
perform, the Company may be required to discharge the obligations of the nonperforming party. In such
circumstances, the Company may sustain a loss if the market value of the financial instrument or foreign
currency is different from the contract value of the transaction.
The majority of the Company’s transactions and, consequently, the concentration of its credit exposure is
with customers, broker-dealers and other financial institutions. These activities primarily involve collateralized
and uncollateralized arrangements and may result in credit exposure in the event that the counterparty fails to
meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile
financial markets, which may impair the ability of counterparties to satisfy their contractual obligations. The
Company seeks to control its credit risk through a variety of reporting and control procedures, including
establishing credit limits based upon a review of the counterparties’ financial condition and credit ratings. The
Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and
requests changes in collateral levels as appropriate.
F-22