Air Canada 2010 Annual Report Download - page 129

Consolidated Financial Statements and Notes
129
Collateral Held in Leasing Arrangements
The Corporation holds security deposits with a carrying value of $11 (2009 - $10), which approximates fair value, as security
for certain aircraft leased and sub-leased to third parties. These deposits do not pay interest to the lessee or sub-lessee. Of
these deposits, $7 (2009 - $7) have been assigned as collateral to secure the Corporation’s obligations to the lessors and
financiers of the aircraft, with the remaining cash held by Air Canada being unrestricted during the term of the lease. Any
collateral held by the Corporation is returned to the lessee or sub-lessee, as the case may be, at the end of the lease or sub-
lease term provided there have been no events of default under the leases or sub-leases.
Summary of Gain on Financial Instruments Recorded at Fair Value
2010 2009
Fuel derivatives not under hedge accounting (11) 102
Other 8 (7)
Gain (loss) on financial instruments recorded at fair value (1) $ (3) $ 95
(1) See Fuel Price Risk for a discussion of losses on fuel derivatives recorded in Other comprehensive income (“OCI”).
Risk Management
Under its risk management policy, the Corporation manages its interest rate risk, foreign exchange risk, share-based
compensation risk and market risk through the use of various interest rate, foreign exchange, fuel and other derivative
financial instruments. The Corporation uses derivative financial instruments only for risk management purposes, not for
generating trading profit. As such, any change in cash flows associated with derivative instruments is designed to be offset
by changes in cash flows related to the risk being hedged.
As noted below, the Corporation engages in derivative hedging to mitigate various risks. The derivative fair values represent
the amount of the consideration that could be exchanged in an arm’s length transaction between willing parties who are
under no compulsion to act. Fair value of these derivatives is determined using active markets, where available. When
no such market is available, valuation techniques are applied such as discounted cash flow analysis. Where practical, the
valuation technique incorporates all factors that would be considered in setting a price, including the Corporation’s own
credit risk and the credit risk of the counterparty.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Corporation enters into both fixed and floating rate debt and also leases certain assets where the rental amount
fluctuates based on changes in short term interest rates. The Corporation manages interest rate risk on a portfolio
basis and seeks financing terms in individual arrangements that are most advantageous taking into account all relevant
factors, including credit margin, term and basis. The risk management objective is to minimize the potential for changes
in interest rates to cause adverse changes in cash flows to the Corporation. The temporary investment portfolio which
earns a floating rate of return is an economic hedge for a portion of the floating rate debt.
The ratio of fixed to floating rate obligations outstanding is designed to maintain flexibility in the Corporation’s capital
structure and is based upon a long term objective of 60% fixed and 40% floating but allows flexibility in the short-term
to adjust to prevailing market conditions. The ratio at December 31, 2010 is 69% fixed and 31% floating, including the
effects of interest rate swap positions (59% and 41%, respectively as at December 31, 2009).