Adidas 2005 Annual Report Download - page 152

148 Financial Analysis
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… Financial Instruments
Management of Foreign Exchange Risk
The Group is subject to currency exposure, primarily due to an imbalance of its global cash
fl ows 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 identifi ed currency
risks arising from forecasted transactions when it becomes exposed. In addition, the Group
hedges balance sheet risks selectively.
Risk management is conducted by using natural hedges and arranging forward contracts,
currency options and currency swaps. It is Group policy to have a high share of hedging instru-
ments, such as currency options or option combinations, which provide protection and, at the
same time, retain the potential to benefi t from future favorable exchange rate developments in
the fi nancial markets. In 2005, the Group contracted currency options with premiums paid in
a total amount of € 27 million (2004: € 22 million), of which € 11 million were paid for hedges
relating to the acquisition of Reebok International Ltd. (2004: € 0 million). The change in the
intrinsic value of currency options is recorded in other comprehensive income in the consoli-
dated statement of recognized income and expense and posted into the profi t and loss state-
ment at the same time as the underlying transaction is recorded; a total amount of € 19 mil-
lion impacted net income in 2005 (2004: € 17 million). Paid option premiums (as part of the
total capitalized fair value) in an amount of € 31 million and € 25 million were deferred as at
December 31, 2005 and 2004, respectively.
The total net amount of US dollar purchases against other currencies was US $ 1.8 billion and
US $ 1.7 billion in the years ending December 31, 2005 and 2004, respectively.
The notional amounts of all outstanding currency hedging instruments, which are mainly
related to cash fl ow hedges, are summarized in the following table:
The comparatively high amount of forward contracts is primarily due to currency swaps
for liquidity management purposes and hedging transactions, in which the US dollar is not
involved.
Of the total amount of outstanding hedges, the following contracts related to coverage of the
biggest single exposure, the US dollar:
Of the notional amounts of the outstanding currency options, € 1,161 million related to hedges
for the acquisition of Reebok International Ltd.
The fair value of all outstanding currency hedging instruments is as follows:
The total positive fair value of € 15 million of forward contracts relates to hedging instruments
falling under hedge accounting as per defi nition of IAS 39. The total fair value of outstanding
currency options relates to cash fl ow hedges.
The fair value adjustments of outstanding cash fl ow hedges for forecasted sales will be reported
in the income statement when the forecasted sales transaction is recorded, the wide majority
being forecasted for 2006.
Notional Amounts of All Currency Hedging Instruments € in millions
Dec. 31 Dec. 31
2005 2004
Forward contracts 1,048 871
Currency options 2,049 848
Total 3,097 1,719
Notional Amounts of US Dollar Hedging Instruments € in millions
Dec. 31 Dec. 31
2005 2004
Forward contracts 436 326
Currency options 1,975 657
Total 2,411 983
Fair Value € in millions
Dec. 31 Dec. 31
2005 2004
Forward contracts 15 (16)
Currency options 59 (10)
Total 74 (26)