Annual Report 1998 - Omron

Derivatives
The fair value of derivatives generally reflects the estimated amounts that the Companies would receive
or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized
gains or losses of open contracts. Dealer quotes are available for most of the Companies’ derivatives; otherwise,
pricing or valuation models are applied to current market information to estimate fair value. The
Companies do not use derivatives for trading purposes.
(1) Interest rate swap contracts:
The Companies enter into interest rate swap agreements to manage exposure to fluctuations in
interest rates. These agreements involve the exchange of interest obligations on fixed and floating
interest rate debt without exchange of the underlying principal amounts. The agreements generally
mature at the time the related debt matures. The differential paid or received on interest rate swap
agreements is recognized as an adjustment to interest expenses. Notional amounts are used to
express the volume of interest rate swap agreements. The notional amounts do not represent cash
flows and are not subject to risk of loss. In the unlikely event that the counterparty fails to meet the
terms of an interest rate swap agreement, the Companies’ exposure is limited to the interest rate
differential. Management considers the exposure to credit risk to be minimal since the counterparties
are major financial institutions.
At March 31, 1998 and 1997, the notional amounts on which the Companies had interest rate
swap agreements outstanding aggregated ¥6,000 million ($45,455 thousand) and ¥12,500 million,
respectively. The estimated fair values of interest rate swap contracts are based on the present values
of discounted future cash flow analysis.
(2) Foreign exchange forward contracts and foreign currency options:
The Companies enter into foreign exchange forward contracts and engage in the purchase and
writing of foreign currency option contracts to hedge foreign currency transactions (primarily the
U.S. dollar, the deutsche mark and other European currencies) on a continuing basis for periods
consistent with their committed exposure. Some of the contracts involve the exchange of two foreign
currencies, according to local needs in foreign subsidiaries. The terms of the currency derivatives
are rarely more than 10 months. The credit exposure of foreign exchange contracts and
currency purchase options are represented by the positive fair value of the contracts at the reporting
date. Management considers the exposure to credit risk to be minimal since the counterparties
are major financial institutions.
The notional amounts of contracts to exchange foreign currency (forward contracts) and currency
options purchased and written outstanding at March 31, 1998 and 1997 were as follows:
Thousands of
Millions of yen
U.S. dollars
1998 1997 1998
Related to receivables and future sales:
Forward contracts......................................................................................... ¥24,867 ¥20,221 $188,386
Options purchased and written.................................................................... 8,885 2,690 67,311
The notional amounts do not represent the amounts exchanged by the parties to derivatives and are
not a measure of the Companies’ exposure through their use of derivatives. The amounts exchanged
are determined by reference to the notional amounts and the other terms of the derivatives.
The Companies hedge certain exposures to fluctuations in foreign currency exchange rates that
occur prior to conversion of foreign currency denominated monetary assets and liabilities into the
functional currency. Prior to the conversion of the functional currency, these assets and liabilities are
translated at the spot rates in effect on the balance sheet date. The effects of changes in spot rates are
reported in earnings and included in Foreign exchange loss, net, in the consolidated statements of
income. The Company hedges its exposure to changes in foreign exchange with forward contracts.
Because monetary assets and liabilities are marked to spot and recorded in earnings, forward contracts
designated as hedges of the monetary assets and liabilities are also marked to spot with the resulting
gains and losses similarly recognized in earnings. Gains and losses on forward contracts are included in
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