Canon 2007 Annual Report Download - page 93

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91
December 31 Thousands of
Millions of yen U.S. dollars
2007 2006 2007
To sell foreign currencies ¥697,240 ¥717,136 $6,116,140
To buy foreign currencies 46,897 51,189 411,377
19. Derivatives and Hedging Activities
Risk management policy
Canon operates internationally, exposing it to the risk of
changes in foreign currency exchange rates. Derivative financial
instruments are comprised principally of foreign exchange
contracts utilized by the Company and certain of its subsidiaries
to reduce the risk. Canon assesses foreign currency exchange
rate risk by continually monitoring changes in the exposures
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, but it is not expected that any counterparties will
fail to meet their obligations, because most of the counterparties
are internationally recognized financial institutions and contracts
are diversified across a number of major financial institutions.
Foreign currency exchange rate risk management
Canon’s international operations expose Canon to the risk of
changes in foreign currency exchange rates. Canon uses
foreign exchange contracts to manage certain foreign currency
exchange exposures principally from the exchange of U.S.
dollars and euros into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of fore-
casted intercompany sales and intercompany trade receivables
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.
Cash flow hedge
Changes in the fair value of derivative financial instruments
designated as cash flow hedges, including foreign exchange
contracts associated with forecasted intercompany sales, are
reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassified into earnings
through other income (deductions) in the same period as the
hedged items affect earnings. Substantially all amounts
recorded in accumulated other comprehensive income (loss) at
year-end are expected to be recognized in earnings over the
next 12 months. Canon excludes the time value component
from the assessment of hedge effectiveness. Changes in the
fair value of a foreign exchange contract for the period
between the date that the forecasted intercompany sales
occur and its maturity date are recognized in earnings and not
considered hedge ineffectiveness.
The amount of the hedging ineffectiveness was not material
for the years ended December 31, 2007, 2006 and 2005. The
amount of net gains or losses excluded from the assessment of
hedge effectiveness (time value component) which was recorded
in other income (deductions) was net losses of ¥6,883 million
($60,377 thousand), ¥5,917 million and ¥3,725 million for the
years ended December 31, 2007, 2006 and 2005, respectively.
Derivatives not designated as hedges
Canon has entered into certain foreign exchange contracts to
manage its foreign currency exposures. These foreign exchange
contracts have not been designated as hedges. Accordingly,
the changes in fair value of the contracts are recorded in
earnings immediately.
Contract amounts of foreign exchange contracts at
December 31, 2007 and 2006 are set forth below: