Canon 2003 Annual Report Download - page 42

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MARKET RISK EXPOSURE
Canon is exposed to market risks, including changes in foreign
exchange rates, interest rates and prices of marketable securities
and marketable investments. In order to hedge the risks of
changes in foreign exchange rates and interest rates, Canon uses
derivative financial instruments.
Equity price risk
Canon holds marketable securities included in current assets for
short-term investment, which consists generally of highly-liquid
and low-risk instruments. Marketable investments included in
noncurrent assets are held as longer-term investments. Canon
does not hold marketable securities and investments for trading
purposes.
Maturities and fair values of such marketable securities and
investments were as follows at December 31, 2003.
Foreign exchange rate and interest rate risk
Canon operates internationally and is therefore exposed to the
risk of changes in foreign exchange rates and interest rates. The
Company and certain of its subsidiaries utilize various derivative
financial instruments, principally foreign exchange contracts and
interest rate swaps, to reduce these risks. Canon assesses the
risks of foreign currency exchange and interest rates by
continually monitoring changes in its exposure to these risks and
by evaluating hedging opportunities. Canon does not hold or
issue derivative financial instruments for trading purposes. Canon
is also exposed to credit-related losses in the event of non-
performance by counterparties to derivative financial
instruments; however, Canon does not expect that any
counterparties will fail to meet their obligations, because most of
the counterparties are internationally recognized financial
institutions and the contracts are diversified across a number of
major financial institutions.
The major manufacturing bases of Canon are located in
Japan and other countries in Asia. The sales generated from
overseas are mainly denominated in U.S. dollars or euro.
Therefore, Canon’s international operations expose Canon to the
risk of changes in foreign currency exchange rates. Canon enters
into foreign exchange contracts to manage certain foreign
currency exchange exposures principally from the exchange of
U.S. dollars and euro into yen. These contracts are primarily
used to hedge the foreign currency exposure of forecasted
intercompany sales, which are denominated in foreign
currencies. In accordance with Canon’s policy, a specific portion
of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange
contracts, which principally mature within three months.
The table on page 41 provides information about Canon’s
major derivative financial instruments related to foreign currency
exchange transactions existing at December 31, 2003. All of the
foreign exchange contracts described in the following table have
a contractual maturity date in 2004.
Millions of yen Thousands of U.S.dollars
Cost Fair Value Cost Fair Value
Due within one year ¥ 194 202 $ 1,813 1,888
Due after one year through five years 1,480 1,932 13,832 18,056
Due after five years 5,951 6,002 55,617 56,094
Equity securities 7,569 22,977 70,738 214,738
¥15,194 31,113 $ 142,000 290,776