Proctor and Gamble 2000 Annual Report Download - page 35

The Procter & Gamble Company and Subsidiaries
33
Millions of dollars except per share amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain currency interest rate swaps are designated as hedges of
the Company’s foreign net investments. Currency effects of these
hedges are reflected in the accumulated other comprehensive
income section of shareholders’ equity, offsetting a portion of the
translation of the net assets.
The following table presents information for all interest rate instru-
ments. The notional amount does not necessarily represent
amounts exchanged by the parties and, therefore, is not a direct
measure of the Company’s exposure to credit risk. The fair value
approximates the cost to settle the outstanding contracts. The
carrying value includes the net amount due to counterparties
under swap contracts, currency translation associated with
currency interest rate swaps and any marked-to-market value
adjustments of instruments.
June 30
2000 1999
Notional amount $7,955 $1,614
Fair value $ 105 $7
Carrying value 149 15
Unrecognized loss (44) (8)
The increase in notional amount is due primarily to increased
emphasis on matching the currency component of assets and liabil-
ities on the Company’s consolidated balance sheet. This activity
hedges currency exposures in two ways. It hedges the Company’s net
investment position in major currencies and generates foreign cur-
rency interest payments which offset other transactional foreign
exchange exposures in these currencies.
Although derivatives are an important component of the Company’s
interest rate management program, their incremental effect on
interest expense for 2000, 1999 and 1998 was not material.
Currency Rate Management
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to
movements in foreign currency exchange rates.
The Company’s major foreign currency exposures involve the
markets in Western and Eastern Europe, Asia and Mexico. The
primary purpose of the Company’s foreign currency hedging activ-
ities is to manage the volatility associated with foreign currency
purchases of materials and other assets and liabilities created in
the normal course of business. Corporate policy prescribes the
range of allowable hedging activity. The Company primarily utilizes
forward exchange contracts and purchased options with maturities
of less than eighteen months.
In addition, the Company enters into certain foreign currency swaps
to hedge intercompany financing transactions. The Company also
utilizes purchased foreign currency options with maturities of gener-
ally less than eighteen months and forward exchange contracts to
hedge against the effect of exchange rate fluctuations on royalties
and income from international operations.
Gains and losses related to qualifying hedges of foreign currency
firm commitments or anticipated transactions are deferred in
prepaid expense and are included in the basis of the underlying
transactions. To the extent that a qualifying hedge is terminated or
ceases to be effective as a hedge, any deferred gains and losses up
to that point continue to be deferred and are included in the basis
of the underlying transaction. All other foreign exchange contracts
are marked-to-market on a current basis, generally to marketing,
research and administrative expense. To the extent anticipated
transactions are no longer likely to occur, the related hedges are
closed with gains or losses charged to earnings on a current basis.
Currency instruments outstanding are as follows:
June 30
2000 1999
Notional amount
Forward contracts $1,822 $1,988
Purchased options 1,147 1,358
Currency swaps 033
Fair value
Forward contracts 4(6)
Purchased options 18 19
Currency swaps 05
The reduction in the notional amount of currency instruments
outstanding reflects the increased efficiencies of our centralized
global hedge program, including the foreign exchange exposure
offsets generated by foreign currency interest payments. The
deferred gains and losses on these currency instruments were
not material.
In addition, in order to hedge currency exposures related to the net
investments in foreign subsidiaries, the Company utilizes local
currency financing entered into by the subsidiaries, currency inter-
est rate swaps and other foreign currency denominated financing
instruments entered into by the parent. Gains and losses on instru-
ments designated as hedges of net investments are offset against
the translation effects reflected in shareholders’ equity.