2007 Annual Report - Sappi

31. Financial Instruments continued
The fair value of foreign currency contracts have been computed by the group based upon the market data valid on
30 September 2007.
All forward currency exchange contracts are valued at fair value with the resultant profit or loss included in the net finance
costs for the period.
Forward exchange contracts are used to hedge the group from potential unfavourable exchange rate movements that may
occurs on recognised financial assets and liabilities or planned future commitments.
The foreign currency forward exchange contracts have different maturities, with the most extended maturity date is
September 2008.
As at the year end there was an open exposure of US$44.8 million which will have to be covered within three working days
as per the treasury policy.
Sensitivity analysis
In USD
Gain (loss)
Base currency US$ million Exposure +10% -10%
EUR (9.4) (0.9) 1.0
GBP (21.3) (1.9) 2.4
USD 3.0 0.3 (0.3)
ZAR (23.9) (2.1) 2.7
Other currencies 6.8 0.6 (0.8)
Total (44.8) (4.0) 5.0
5. Hedge accounting
The group has the following fair value hedges which qualify for hedge accounting:
Bonds at fixed interest rates for a total notional amount of US$856 million are hedged by seven external interest rate swaps
(IRS), with a negative fair value of US$10.2 million which convert the USD fixed interest rates into floating 6-month LIBOR in
arrears. The hedged risk is designated to be the interest rate risk arising from fluctuations in the US Libor swap curve. The
effect of this transaction is to convert fixed rate debt into floating rate debt.
In fiscal 2005 the hedge was de-designated and re-designated. During this period hedge accounting was interrupted for a
certain number of deals. The changes in fair value of the bonds until the moment of de-designation are amortised over the
remaining life of the hedge.
In fiscal 2007 Sappi decided to replace their valuation and hedge effectiveness tool with the REVALHedgeRx. It was decided
to switch from the Volatility Reduction Method (VRM) and the Volatility Variance Method (VVM), and to use the linear regression
analysis method as an alternative statistical test, which is appropriate to test hedge effectiveness of a fair value hedge.
A change in the hedge effectiveness measurement methodology requires the de-designation of the existing hedge relationship.
Simultaneously a re-designation of the same hedge relationship was carried out catering however for a revised hedge
effectiveness measurement methodology. There was no material impact on the income statement as a result of this change.
As the swaps were contracted after the issuance of the underlying bonds, at the time of designating the hedge relationship
it was required to mark-to-market the bonds in order to create an initial market value benchmark which was different to the
face value as market condtions had changed since inception of the bonds. All future mark-to-markets of the bonds are
measured against this benchmark.
sappi limited | 07 | annual report 149