Virgin Media 2010 Annual Report Download - page 126

VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 10—Derivative Financial Instruments and Hedging Activities
Strategies and Objectives for Holding Derivative Instruments
Our results are materially impacted by changes in interest rates and foreign currency exchange rates. In an
effort to manage these risks, we periodically enter into various derivative instruments including interest rate
swaps, cross- currency interest rate swaps and foreign exchange forward rate contracts. We are required to
recognize all derivative instruments as either assets or liabilities at fair value on our consolidated balance sheets,
and to recognize certain changes in the fair value of derivative instruments in our consolidated statements of
operations.
We have entered into cross-currency interest rate swaps and foreign currency forward rate contracts to
manage interest rate and foreign exchange rate currency exposures with respect to our U.S. dollar ($) and euro
(€) denominated debt obligations. Additionally, we have entered into interest rate swaps to manage interest rate
exposures resulting from variable rates of interest we pay on our U.K. pound sterling (£) denominated debt
obligations. We have also entered into U.S. dollar forward rate contracts to manage our foreign exchange rate
currency exposures related to certain committed and forecasted purchases.
Whenever it is practical to do so, we designate a derivative contract as either a cash flow or fair value hedge
for accounting purposes. These derivatives are referred to as “Accounting Hedges” below. When a derivative
contract is not designated as an Accounting Hedge, the derivative will be treated as an economic hedge with
mark-to-market movements and realized gains or losses recognized through gains (losses) on derivative
instruments in the statements of operations. These derivatives are referred to as “Economic Hedges” below. We
do not enter into derivatives for speculative trading purposes.
In respect to Accounting Hedges, we believe our hedge contracts will be highly effective during their term
in offsetting changes in cash flow or fair value attributable to the hedged risk. We perform, at least quarterly,
both a prospective and retrospective assessment of the effectiveness of our hedge contracts, including assessing
the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly
effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of
the derivative in gains or losses on derivative instruments in the consolidated statements of operations. As a
result of our effectiveness assessment at December 31, 2010, we believe our derivative contracts that are
designated and qualify for hedge accounting will continue to be highly effective in offsetting changes in cash
flow or fair value attributable to the hedged risk.
The foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps are
valued using counterparty valuations, or market transactions in either the listed or over-the-counter markets,
adjusted for non-performance risk. Non-performance risk is based on quoted credit default spreads for
counterparties to the contracts and swaps. These derivative instruments are classified within level 2 in the fair
value hierarchy. Derivative instruments which are subject to master netting arrangements are not offset and we
have not provided, nor do we require, cash collateral with any counterparty.
Refer to notes 8 and 9 for a discussion of the conversion hedges.
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