D-Link 2001 Annual Report Download - page 57

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25
D-LINK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Forward foreign currency exchange contracts
D-Link used foreign currency forward contracts to hedge existing accounts receivable
denominated in foreign currencies. As of December 31, 2001, the notional principal of
outstanding forward foreign currency exchange contracts D-Link entered into was USD 8,000
thousand. The details of the above forward foreign currency exchange contracts balance as of
December 31, 2001, are as follows:
2000
Forward contracts receivable $ 275,975
Forward contracts payable 276,146
$ (171)
Fair value $ (1,756)
(d) Fair value and risk
(i) Credit risk
Credit risk represents the accounting loss that would be recognized at the reporting date if
counter-parties failed to perform as contracted. Credit risk will increase as the derivative
instruments become more profitable. D-Link entered into the above derivative contracts
with reputable financial institutions. The likelihood of default on the part of the counter-
parties is remote.
(ii) Market price risk
Market price risk represents the accounting loss that would be recognized at the reporting
date for the derivative financial instruments due to the changes in market interest rates or
foreign exchange rates. As D-Link’ s derivative financial instruments are for hedging
purposes, the gains or losses due to changes in the interest rates or foreign exchange rates
will be naturally offset by the hedged items. As a result, market price risk is considered low.
(iii) Liquidity risk
Liquidity risk is the risk of being unable to settle derivative contracts on schedule. The
purpose of these instruments held by D-Link was to manage and hedge the floating interest
rate and foreign currency rate. There is no significant liquidity risk for the related cash
flows.