Adidas 2003 Annual Report Download - page 146

Out of the total amount of outstanding hedges, the following contracts relate to the coverage of
the biggest single exposure, the US dollar:
NOTIONAL AMOUNTS OF US DOLLAR HEDGING INSTRUMENTS € in millions
Dec. 31 Dec. 31
2003 2002
Forward contracts 234 307
Currency options 504 522
Total 738 829
The fair value of all outstanding currency hedging instruments is as follows:
FAIR VALUE € in millions
Dec. 31 Dec. 31
2003 2002
Forward contracts 6(10)
Currency options (16) (8)
Total (10) (18)
Out of the positive fair value of € 6 million of forward contracts, negative € 4.2 million relate to
hedging instruments falling under hedge accounting as per definition of IAS 39, split into a negative
fair value of € 5.3 million from cash flow hedges and a positive fair value of € 1.1 million from net
investment hedges (see further details below). The total fair value of outstanding currency options
relates 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 2004. A minority of cash flow hedges relate to an embedded derivative
within a specific contract and will be transferred from equity to the income statement at specified
payment dates up to 2008 as per the contract. The embedded derivative is not separated from the
host contract, as the economic characteristics and risk of the embedded derivative are closely
related to the host contract. Other significant embedded derivatives did not exist at the balance
sheet date.
In addition, adidas-Salomon hedges part of its net investment in Salomon & Taylor Made Co.,
Ltd., Tokyo (Japan) with forward contracts. A related gain of € 1.5 million in 2003 is recognized in
equity.
Management of Interest Rate Risk
It has been the policy of the Group to concentrate its financing on short-term borrowings, but to
protect against liquidity risks with longer-term financing agreements, and to protect against the
risk of rising interest rates with interest rate caps. In view of the continuing decline of the borrow-
ings, no additional caps were arranged in 2003. Further, during 2003 adidas-Salomon made use of
the historically low long-term interest rates to shift parts of its borrowings from floating to fixed-
rate financing arrangements. The share of fixed-rate financing rose sharply as a result of the
issuance of the convertible bond and the long-term private placements with investors in the USA
and the Far East.
The interest rate hedges which were outstanding as at December 31, 2003 and 2002 respec-
tively expire as detailed below:
EXPIRATION DATES OF INTEREST RATE HEDGES € in millions
Dec. 31 Dec. 31
2003 2002
Within 1 year 204 244
Between 1 and 3 years 721 426
Between 3 and 5 years 50 569
Total 975 1,239
The above instruments had a negative fair value of € 3 million as at December 31, 2003 and
2002.
Some of the instruments qualify as cash flow hedges pursuant to IAS 39. The related positive
change in fair value of € 0.2 million was credited in equity and will be expensed according to inter-
est rate developments in parallel to the underlying hedged item. The negative change in the fair
value of the remaining instruments of € 0.2 million was recorded directly in the income statement,
as incurred.
Credit Risk
The Group’s treasury arranges currency and interest rate hedges, and invests cash, with major
banks of a high credit standing throughout the world, all being rated “A-” or higher in terms of
Standard & Poor’s long-term ratings (or a comparable rating from other rating agencies).
142 FINANCIAL ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS (IFRS) /// NOTES TO THE CONSOLIDATED BALANCE SHEET