Sunbeam 2007 Annual Report Download - page 90

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10. Derivative Financial Instruments
The fair value and notional amounts of derivative financial instruments at December 31, 2007 and 2006, are
presented below (in millions):
Notional
Amount
Fair Value
Asset
(Liability)
Weighed Average
Maturity (years)
December 31, 2007
Cash flow hedges:
Interest rate swaps ..................... $925.0 $(16.0) 1.6
Forward foreign exchange rate contracts .... 265.0 (4.9) 0.6
Fair value hedges:
Cross-currency swaps ................... 27.9 (6.0) 4.1
Derivatives not designated as effective hedges:
Interest rate swaps ..................... 100.0 (0.5) 1.2
Forward foreign exchange rate contracts .... 21.6 (0.7) 0.3
Notional
Amount
Fair Value
Asset
(Liability)
Weighed Average
Maturity (years)
December 31, 2006
Cash flow hedges:
Interest rate swaps ..................... $725.0 $(1.1) 2.0
Forward foreign exchange rate contracts .... 177.7 0.7 0.5
Fair value hedges:
Interest rate swaps ..................... 105.0 (4.1) 5.3
Cross-currency swaps ................... 41.8 (0.7) 5.1
The Company actively manages its fixed and floating rate debt mix using interest rate swaps. The Company
will enter into fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its
consolidated results of operations and future cash outflows for interest. Floating rate swaps are used to convert
the fixed rates of long-term debt into short-term variable rates to take advantage of current market conditions.
Fixed rate swaps are used to reduce the Company’s risk of increasing interest costs. Interest rate swap contracts
are therefore used by the Company to separate interest rate risk management from the debt funding decision.
At December 31, 2007, the interest rate on approximately 65% of the Company’s debt was fixed by either
the nature of the obligation or through interest rate swap contracts.
The Company’s derivative activities do not create additional risk because gains and losses on derivative
contracts offset gains and losses on the liabilities and transactions being hedged. As derivative contracts are
initiated, the Company designates the instruments individually as either a fair value hedge or a cash flow hedge.
Management reviews the correlation and effectiveness of its derivatives on a periodic basis.
The Company is exposed to credit loss in the event of non-performance by the counterparties to its existing
hedges, all of which are highly rated institutions; however, the Company does not anticipate non-performance by
such counterparties.
Fair Value Hedges
The cross-currency swap exchange the variable interest rate bases of the U.S. dollar balance (3-month U.S.
LIBOR plus a spread of 175 basis points) and the equivalent Canadian dollar balance (3-month CAD BA plus a
spread of 192 basis points). This swap instrument is designated as a fair value hedge of certain U.S. dollar-based
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