Reebok 2006 Annual Report Download - page 175

› Notes to the Consolidated Balance SheetNotes ›171
24 » Financial Instruments
Management of Foreign Exchange Risk
The Group is subject to currency exposure, primarily due to an imbalance of its global cash
flows caused by the high share of product sourcing invoiced in US dollars, while sales other
than in US dollars are invoiced mainly in European currencies, but also in Japanese yen,
Canadian dollars and other currencies. It is the Group’s policy to hedge identified currency
risks arising from forecasted transactions when they become exposed. In addition, the Group
hedges balance sheet risks in limited cases.
Risk management is conducted by using natural hedges and arranging forward con-
tracts, currency options and currency swaps. It is Group policy to have a high share of hedging
instruments, such as currency options or option combinations, which provide protection and,
at the same time, retain the potential to benefit from future favorable exchange rate develop-
ments in the financial markets. In 2006, the Group contracted currency options with premiums
paid in a total amount of € 11 million (2005: € 27 million). The effective part of the currency
hedges is directly recognized in hedging reserves and the acquisition costs of secured inven-
tories, respectively, and posted into the income statement at the same time as the underlying
secured transaction is recorded. An amount of negative € 4 million for currency options and
an amount of negative € 17 million for forward contracts were recorded in hedging reserves. A
total amount of € 27 million impacted net income in 2006 (2005: € 19 million).
The fair value of the currency options not being part of the hedge in an amount of negative
€ 9 million was recorded in the income statement immediately. Paid option premiums (as part
of the total capitalized fair value) in an amount of € 14 million and € 31 million were deferred
as at December 31, 2006 and 2005, respectively.
The total net amount of US dollar purchases against other currencies was US $ 3.2 billion
and US $ 1.8 billion in the years ending December 31, 2006 and 2005, respectively.
The notional amounts of all outstanding currency hedging instruments, which are mainly
related to cash flow hedges, are summarized in the following table:
The comparatively high amount of forward contracts is primarily due to currency swaps for
liquidity management purposes and hedging transactions.
Of the total amount of outstanding hedges, the following contracts related to coverage of
the biggest single exposure, the US dollar:
The fair value of all outstanding currency hedging instruments is as follows:
The total negative net fair value of € 17 million of forward contracts related to hedging instru-
ments falling under hedge accounting as per definition of IAS 39 and was recorded in hedging
reserve. The remaining negative fair value of € 2 million related to liquidity swaps for cash
management purposes was recorded in the income statement immediately. The total fair value
of outstanding currency options related to cash flow hedges.
The fair value adjustments of outstanding cash flow hedges for forecasted sales will be
reported in the income statement when the forecasted sales transaction is recorded, the wide
majority being forecasted for 2007. Inventories were adjusted by € 11 million as at December
31, 2006, which will be recognized in the income statement in 2007.
Notional Amounts of All Currency Hedging Instruments € in millions
Dec. 31 Dec. 31
2006 2005
Forward contracts 1,771 1,048
Currency options 566 2,049
Total 2,337 3,097
Notional Amounts of US Dollar Hedging Instruments € in millions
Dec. 31 Dec. 31
2006 2005
Forward contracts 656 436
Currency options 543 1,975
Total 1,199 2,411
Fair Value € in millions
Dec. 31 2006 Dec. 31 2005
Positive Negative Positive Negative
fair fair fair fair
value value value value
Forward contracts 7 (26) 24 (9)
Currency options 6 (9) 68 (9)
Total 13 (35) 92 (18)