Annual Report 2005 - Tenaris

Explanatory notes
78. TenarisConfab
18. Financial Instruments
The parent company and its subsidiaries engage in transactions
with financial instruments to reduce exposure to
the effects of changes in interest and exchange rates and
other market risks. Transactions observe guidelines established
and monitored by the board of the company.
a. Valuing of financial instruments
The Company's main asset and liability financial instruments
on December 31, 2005 are herein described, together
with the criteria for valuing / evaluating them:
(I) Cash and banks, financial investments, accounts receivable,
other current assets and accounts payable
The amounts accounted for are approximate to those realized.
(II) Investments
These consist mainly of investments in private subsidiaries,
recorded by the equity equivalence method, which are of
strategic interest to the company. The market value of the
shares held is not taken into consideration.
(III) Loans and financing
Subject to normal market interest rates, as described in
Note 11.
b. Risk Management
The main risks the Company and its subsidiaries are
exposed to are of a strategic/operational and
economic/financial nature.
Operational-strategic risks, such as demand behavior, competition
and technology are taken into consideration in the
company's management model.
Economic financial risk reflects mainly the behavior of macroeconomic
variables, such as interest and exchange rates.
Policies and guidelines determined by the company management
forbid speculative negotiation and establish the
diversification of instruments and counterparts. They also
aim to constantly monitor and evaluate the global portfolio
position in order to measure financial results and the
impact on cash flow.
To protect its assets, the company and its subsidiaries
adopt conservative fund raising and financial investment
policies and seek to minimize the cost of capital.
(I) Interest Rate Risk
Interest rate risk comes from that portion of debt contracted
at floating rates. The portion of debt in foreign currency
at floating rates is subject mainly to the oscillations of the
LIBOR-(London Interbank Offered Rate) rate.
The portion of the debt in reais subject to floating rates consists
basically of that subject to Brazilian long term interest
rate (TJLP), determined by the Brazilian Central Bank.
(II) Exchange Rate Risk
The Company monitors the effect of exchange rate oscillations
on its assets and liabilities in foreign currency and on
the commercial flow of contracts on the books and under
negotiation. Additionally, it strives to diversify its financial
investments between domestic and foreign currency (reais
and U.S dollar), in accordance with its working capital and
estimated usage of same. Financial derivative operations
are on occasion used to ameliorate specific risks related to
these positions.