Adidas 2002 Annual Report Download - page 135

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Service Arrangements
The Group has outsourced certain logistic and information technology functions, for which it has
entered into long-term contracts. Financial commitments under these contracts mature as follows:
21 /// 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 it becomes exposed. In addition, the Group hedges balance sheet risk selectively.
Risk management is conducted by using natural hedges and arranging forward contracts,
currency options and currency swaps. At an early stage in the decline of the US dollar in spring
2002, the share of options was significantly increased to create more potential for utilizing benefits
from the expected further decline.
In 2002, the Group contracted currency options with premiums paid in a total amount of
€ 12.2 million (2001: € 3.1 million). As currency options serve as cash flow hedges for future prod-
uct transactions, the related premiums are recorded in income at the same time as the underlying
transaction is recorded. The total amount of option premiums, which was charged to income in
2002, is € 4.0 million (2001: € 13.7 million). Paid option premiums (as part of the total capitalized
fair value) in an amount of € 11.4 million and € 2.3 million were deferred as at December 31, 2002
and 2001 respectively.
The total net amount of US dollar purchases against other currencies is unchanged at
$ 1.2 billion in the years ending December 31, 2002 and 2001 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 total increase is mainly due to the increased use of short-term swaps to optimize the
Group’s cash management (€ 81 million increase year-over-year).
Out of the total amount of outstanding hedges, the following contracts relate to the coverage
of the biggest single exposure, the US dollar:
The fair value of all outstanding currency hedging instruments is as follows:
133
FAIR VALUE € in millions
Dec. 31 Dec. 31
2002 2001
Forward contracts (10) 28
Currency options (8) 7
Total (18) 35
NOTIONAL AMOUNTS OF US DOLLAR HEDGING INSTRUMENTS USD in millions
Dec. 31 Dec. 31
2002 2001
Forward contracts 322 647
Currency options 547 131
Total 869 778
NOTIONAL AMOUNTS OF ALL CURRENCY HEDGING INSTRUMENTS € in millions
Dec. 31 Dec. 31
2002 2001
Forward contracts 1,141 1,372
Currency options 582 173
Total 1,723 1,545
FINANCIAL COMMITMENTS FOR SERVICE ARRANGEMENTS € in millions
Dec. 31 Dec. 31
2002 2001
Within 1 year 41 51
Between 1 and 5 years 58 92
After 5 years 623
Total 105 166