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Hedging activities
Interest rate hedges
In October 2010, the Company entered into an interest
rate hedge agreement for the entire drawdown of the
term loan which was 171,003 (see note 23). This interest
rate swap was executed as a replacement to the expiring
contract so that the Company could continue to hedge
its exposure to changes in the benchmark interest rate
on the term loan. This swap agreement provides for
a fixed annual interest rate of 1.416% (exclusive of the
margin) paid semi-annually by AMG and a semi-annual
payment by the counterparty of EURIBOR expiring in 2010.
Management has designated the interest rate swap as
a cash flow hedge of the forecasted interest payments
on the debt. At December 31, 2010, the fair value of the
interest rate swap was ($74). This compares to the fair
value of the interest rate swap which expired in 2010
which had a fair value at December 31, 2009 of ($3,441).
The interest rate swap expires upon maturity of the term
loan which is in August 2012.
GK entered into five interest rate hedges for a variety of
floating rate debt instruments to minimize interest rate
risk. The swap agreements provide for fixed interest rates
paid either monthly or quarterly by the Company and
a payment made by the counterparty of EURIBOR. The
contracts expire between 2011 and 2017 depending on
each contract’s underlying debt maturity. Management
has designated the interest rate swaps as cash flow
hedges of the forecasted interest payments on each
respective debt. At December 31, 2010, the fair value of the
various interest rate swaps was ($1,018) (2009: ($1,339)).
There is one ineffective interest rate swap contract as
at December 31, 2010 and 2009. Therefore, all amounts
related to this contract are directly recognized in the
income statement. The amount from effective interest
rate swap cash flow hedges included in equity is ($566)
and ($3,083) in the years ended December 31, 2010 and
2009, respectively. During the years ended December 31,
2010 and 2009, $1,365 and $1,672, respectively, were
transferred from equity to the income statement as
increases to interest expense.
Commodity forward contracts
The Company is exposed to volatility in the prices of raw
materials used in some products and uses commodity
forward contracts to manage these exposures. Such
contracts generally mature within twelve months.
Commodity forward contracts have been designated as
cash flow hedges.
130 Notes to Consolidated Financial Statements
The open commodity forward contracts as at
December 31, 2010 are as follows:
US Dollar denominated
contracts to purchase
commodities:
Metric
tons
Average
price
Fair
value
Aluminum forwards 4,625 2,325 634
US Dollar denominated
contracts to sell
commodities:
Metric
tons
Average
price
Fair
value
Aluminum forwards 1,075 2,351 (121)
The open commodity forward contracts as at
December 31, 2009 are as follows:
US Dollar denominated
contracts to purchase
commodities:
Metric
tons
Average
price
Fair
value
Aluminum forwards 4,050 1,904 1,327
Copper forwards 125 6,106 160
US Dollar denominated
contracts to sell
Metric Average Fair
commodities:
tons price value
Aluminum forwards 925 2,108 43
Copper 25 6,982 12
Due to the economic recession, there were less purchases
and sales of commodities at the beginning of 2009 than
originally planned. Therefore, some contracts no longer
received hedge accounting treatment. The amount of
ineffectiveness recognized in profit or loss that arose
from the commodity cash flow hedges in the year ended
December 31, 2009 was an increase of $453 to cost of
sales. There was no ineffectiveness during the year ended
December 31, 2010. The amount from the commodity cash
flow hedges included in equity was $519 and $1,432 in the
years ended December 31, 2010 and 2009, respectively.
During the years ended December 31, 2010 and 2009,
($612) and $2,072, respectively, were transferred from
equity to the income statement as (decreases) increases
to cost of sales.
Foreign currency forward contracts
At any point in time, the Company also uses foreign
exchange forward contracts to hedge a portion of its
estimated foreign currency exposure in respect of
forecasted sales and purchases, and intergroup loans
that will be repaid in different functional currencies.
These contracts are negotiated to match the terms
of the commitments and generally mature within one
year. When necessary, these contracts are rolled over
at maturity. Some foreign exchange forward contracts
have been designated as cash flow hedges, while other
contracts, although part of the risk management strategy,
have not met the documentation requirements for hedge
accounting and are therefore treated as economic hedges.