Virgin Media 2010 Annual Report Download - page 209

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED AND SUBSIDIARIES
VIRGIN MEDIA INVESTMENTS LIMITED AND SUBSIDIARIES
COMBINED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9—Fair Value Measurements (continued)
Concentrations of credit risk with respect to derivative contracts are focused within a limited number of
international financial institutions with which we operate and relate only to derivatives with recorded asset
balances at December 31, 2010. We perform regular reviews of the financial institutions with which we operate
as to their credit worthiness and financial condition. We have not experienced non-performance by any of our
derivative counterparties nor do we expect there to be non-performance risks associated with our counterparties.
At December 31, 2010, based on market values, we had 57% of our derivative contracts with four financial
institutions, each with more than 10% of our total exposure. At December 31, 2009, based on market values, we
had 68.2% of our derivative contracts with three financial institutions, each with more than 10% of our total
exposure.
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.
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