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Strategy FINANCIAL SECTION
82 Corporate DataBusiness Segment Corporate Structure
17. 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 for-
eign exchange contracts utilized by the Company and cer-
tain of its subsidiaries to reduce the risk. Canon assesses
foreign currency exchange rate risk by continually moni-
toring changes in the exposures and by evaluating hedg-
ing 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-per-
formance by counterparties to derivative financial instru-
ments, but it is not expected that any counterparties will
fail to meet their obligations. Most of the counterparties
are internationally recognized financial institutions and
selected by Canon taking into account their financial con-
dition, 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 cur-
rency 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 forecasted intercompany sales and intercompany trade
receivables that 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 twelve months. Canon excludes the time value com-
ponent 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.
Derivatives not designated as hedges
Canon has entered into certain foreign exchange contracts
to primarily offset the earnings impact related to fluctua-
tions in foreign currency exchange rates associated with cer-
tain assets denominated in foreign currencies. Although
these foreign exchange contracts have not been designated
as hedges as required in order to apply hedge accounting,
the contracts are effective from an economic perspective.
The changes in the fair value of these contracts are recorded
in earnings immediately.
Contract amounts of foreign exchange contracts at December 31, 2013 and 2012 are set forth below:
December 31
Millions of yen
Thousands of
U.S. dollars
2013 2012 2013
To sell foreign currencies ¥ 374,699 ¥ 420,272 $ 3,568,562
To buy foreign currencies 44,726 66,563 425,962