Omron 1999 Annual Report Download - page 43

Derivatives
The fair value of derivatives generally reflects the estimated amounts that the Companies would receive or pay
to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses
of open contracts. Dealer quotes are available for most of the Companies’ derivatives; otherwise, pricing or valua-
tion models are applied to current market information to estimate fair value. The Companies do not use deriva-
tives for trading purposes.
(1) Interest rate swap contracts:
The Companies enter into interest rate swap agreements to manage exposure to fluctuations in interest
rates. These agreements involve the exchange of interest obligations on fixed and floating interest rate debt
without exchange of the underlying principal amounts. The agreements generally mature at the time the
related debt matures. The differential paid or received on interest rate swap agreements is recognized as
an adjustment to interest expense. Notional amounts are used to express the volume of interest rate swap
agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the
unlikely event that the counterparty fails to meet the terms of an interest rate swap agreement, the
Companies’ exposure is limited to the interest rate differential. Management considers the exposure to
credit risk to be minimal since the counterparties are major financial institutions.
At March 31, 1999 and 1998, the notional amounts on which the Companies had interest rate swap
agreements outstanding aggregated ¥12,000 million ($99,174 thousand) and ¥6,000 million, respectively.
The estimated fair values of interest rate swap contracts are based on the present values of discounted
future cash flow analysis.
(2) Foreign exchange forward contracts and foreign currency options:
The Companies enter into foreign exchange forward contracts and engage in the purchase and writing of
foreign currency option contracts to hedge foreign currency transactions (primarily the U.S. dollar, the
deutsche mark and other European currencies) on a continuing basis for periods consistent with their com-
mitted exposure. Some of the contracts involve the exchange of two foreign currencies, according to local
needs in foreign subsidiaries. The terms of the currency derivatives are rarely more than 10 months. The
credit exposure of foreign exchange contracts and currency purchase options are represented by the posi-
tive fair value of the contracts at the reporting date. Management considers the exposure to credit risk to
be minimal since the counterparties are major financial institutions.
The notional amounts of contracts to exchange foreign currency (forward contracts) and currency
options purchased and outstanding at March 31, 1999 and 1998 were as follows:
Thousands of
Millions of yen U.S. dollars
1999 1998 1999
Related to receivables and future sales:
Forward contracts ............................................................................... ¥13,974 ¥24,867 $115,488
Options purchased .............................................................................. —8,885 —
The notional amounts do not represent the amounts exchanged by the parties to derivatives and are not
a measure of the Companies’ exposure through its use of derivatives. The amounts exchanged are deter-
mined by reference to the notional amounts and the other terms of the derivatives.
The Companies hedge certain exposures to fluctuations in foreign currency exchange rates that occur
prior to conversion of foreign currency denominated monetary assets and liabilities into the functional cur-
rency. Prior to the conversion of the functional currency, these assets and liabilities are translated at the spot
rates in effect on the balance sheet date. The effects of changes in spot rates are reported in earnings and
included in Foreign exchange loss—net in the consolidated statements of income. The Company hedges
its exposure to changes in foreign exchange with forward contracts. Because monetary assets and liabili-
ties are marked to spot and recorded in earnings, forward contracts designated as hedges of the monetary
assets and liabilities are also marked to spot with the resulting gains and losses similarly recognized in
earnings. Gains and losses on forward contracts are included in Foreign exchange loss—net in the consoli-
dated statements of income and offset losses and gains on the net monetary assets and liabilities hedged.
The Companies hedge future sales denominated in foreign currencies with purchased and written cur-
rency options to reduce the effective cost of the purchased options. The premiums paid for currency
options purchased and premiums received for currency options written are included in other assets and
other liabilities, respectively, in the consolidated balance sheets and are amortized to Foreign exchange
loss—net in the consolidated statements of income over the terms of the agreements. Gains or losses on
41