Adidas 1996 Annual Report Download - page 55

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The Company uses forward contracts, primarily for the shorter maturities, and cur-
rency options in the management of its currency risks.
December 31, 1996
Notional Fair
(in DM millions) amounts value
Forward contracts 224.0 (0.3)
Currency options 680.2 10.1
904.2 9.8
Deferred gains and losses on forward contracts are not significant.
Management of interest rate risks:
Since the Company’s product sourcing is principally from outside suppliers, most of
its financing concerns inventories and receivables. Taking advantage of lower short-
term rates of most major currencies, the Company has concentrated its borrowings
in short maturities, but it has reduced its exposure with regard to possible future
interest rate increases with the purchase of interest rate caps for a basket of cur-
rencies in a structure which approximates the currency composition of its worldwide
borrowings. These contracts protect the Company’s borrowings in a notional amount
of DM 100 million against a rise of the weighted average interest rate above 6.25%,
up to a limit of 9.75%. If interest rates rise above the upper rate limit, the protection
ends at this upper rate limit.
December 31, 1996
Notional Fair
(in DM millions) amounts value
Interest rate caps 100.0 0.5
Fair value of financial instruments:
The carrying amount of cash, cash equivalents and borrowings approximates fair
value due to the short-term maturities of these instruments. The fair value of forward
exchange contracts and currency options were determined on the basis of the
market conditions on the reporting date. The fair value of the interest rate caps on
the reporting date was assessed by the financial institutions which these caps had
been arranged with.
Credit risk:
The Company arranges its currency and interest rate hedges, and it invests its cash
with major banks of a high credit standing throughout the world, and in high quality
money-market instruments. The Company has not incurred any related losses.
55