Nissan 2007 Annual Report Download - page 71

FINANCIAL SECTION»
Nissan Annual Report 2006-2007 69
Thousands of U.S. dollars
Due in Due after one Due after five
one year or year through years through Due after
Fiscal year 2006 (As of Mar. 31, 2007) less five years ten years ten years
Debt securities........................................................................................................................................................................ $2,661 $ — $ — $ —
Corporate bonds ................................................................................................................................................................... — — 500 —
Total................................................................................................................................................................................................. $2,661 $ — $500 $ —
20. DERIVATIVE TRANSACTIONS
Hedging Policies
The Company and its consolidated subsidiaries (collectively, the
“Group”) utilize derivative transactions for the purpose of hedging
their exposure to fluctuation in foreign exchange rates, interest rates
and market prices. However, based on an internal management rule
on financial market risk (the “Rule”) approved by the Company’s
Board of Directors, they do not enter into transactions involving
derivatives for speculative purposes. The Rule prescribes that (i) the
Group’s financial market risk is to be controlled by the Company in a
centralized manner, and that (ii) no individual subsidiary can initiate a
hedge position without the prior approval of and regular reporting to
the Company.
Risk to be hedged by derivative transactions
(1) Market risk
The financial market risk to which the Group is generally exposed in
its operations and the relevant derivative transactions primarily used
for hedging are summarized as follows:
• Foreign exchange risk associated with assets and liabilities
denominated in foreign currencies: forward foreign exchange
contracts, foreign currency options, and currency swaps;
• Interest rate risk associated with sourcing funds and investing:
interest-rate swaps;
• Risk of fluctuation in stock prices: options on stocks;
• Risk of fluctuation in commodity prices (mainly for precious metals):
commodity futures contracts
(2) Credit risk
The Group is exposed to the risk that a counterparty to its financial
transactions could default and jeopardize future profits. We believe
that this risk is insignificant as the Group enters into derivative
transactions only with financial institutions which have a sound credit
profile. The Group enters into these transactions also with Renault
Finance S.A. (“RF”), a specialized financial subsidiary of the Renault
Group which, we believe, is not subject to any such material risk.
This is because RF enters into derivative transactions to cover
such derivative transactions with us only with financial institutions of
the highest caliber carefully selected by RF based on its own rating
system which takes into account each counterparty's long-term credit
rating and shareholders' equity.
(3) Legal risk
The Group is exposed to the risk of entering into a financial
agreement which may contain inappropriate terms and conditions as
well as to the risk that an existing contract may subsequently be
affected by revisions to the relevant laws and regulations.
The Company’s Legal Department and Finance Department make
every effort to minimize legal risk by reviewing any new agreements
of significance and by reviewing the related documents in a
centralized manner.
Risk Management
All strategies to manage financial market risk and risk hedge
operations of the Group are carried out pursuant to the Rule which
stipulates the Group’s basic policies for derivative transactions,
management policies, management items, procedures, criteria for the
selection of counterparties, and the reporting system, and so forth.
The Rule prescribes that (i) the Group’s financial market risk is to be
controlled by the Company in a centralized manner, and that (ii) no
individual subsidiary is permitted to initiate a hedging operation
without the prior approval of and regular reporting to the Company.
The basic hedge policy is subject to the approval of the Monthly
Hedge Policy Meeting attended by the corporate officer in charge of
Treasury Department. Execution and management of all deals are to
be conducted pursuant to the Rule.
Derivative transactions are conducted by a special section of the
Treasury Department and monitoring of contracts for such
transactions and confirming the balance of all open positions are the
responsibility of back office and risk management section.
Commodity futures contracts are to be handled also by Treasury
Department under guidelines which are to be drawn up by the MRMC
(Materials Risk Management Committee).
The MRMC is chaired by the corporate officer in charge of the
Purchasing Department and the corporate officer in charge of
Treasury Department and it will meet approximately once every six
months.
The status of derivative transactions is reported on a daily basis to
the chief officer in charge of Treasury Department and on an annual
basis to the Board of Directors.
Credit risk is monitored quantitatively with reference to Renault’s
rating system based principally on the counterparties’ long-term
credit ratings and on their shareholders’ equity.
The Finance Department sets a maximum upper limit on positions
with each of the counterparties for the Group and monitors the
balances of open positions every day.