APC 2004 Annual Report Download - page 96

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94
19.3 - Contingent liabilities
General Management is confident that balance sheet
reserves for known disputes in which the Group is
involved are sufficient to ensure that these disputes
do not have a material impact on assets or income.
The loan agreements related to the Group's long-term
debt do not contain any rating triggers, but some
agreements include covenants requiring the Group to
comply with certain financial ratios. As of December
31, 2004, the Group was in compliance with all of
these covenants.
19.4 - Other commitments
No provision has been booked in the consolidated
balance sheet to cover the possible commitments of
Group companies in France in respect of mutual
health insurance plans (MESE).
Note 20 - Financial Instruments
The Group uses financial instruments to hedge its
exposure to risks related to fluctuations in interest
rates, currency rates and metal prices.
20.1 - Currency risk
Because of its international business base, the Group
is exposed to currency risk, notably when subsidiaries
carry out transactions in currencies other than their
functional currency. Currency risks on operating
receivables and payables are hedged by means of
forward sale contracts.
Depending on market conditions, risks in the main
currencies may be hedged based on recurring fore-
cast flows using contracts that expire in 12 months or
less. Certain recently acquired companies use
options to hedge currency risks.
Hedging primarily concerns intra-Group flows and
most of the underlying receivables and payables are
eliminated from the consolidated balance sheet.
Currency risks on local currency intercompany loans
and borrowings are hedged using currency swaps.
20.2 - Interest rate risk
The Group chooses to issue fixed- or variable-rate
debt instruments depending on its overall exposure
and market conditions. To optimize financing costs,
and depending on market conditions, the Group
hedges its interest rate risk using swaps, caps and
floors and other financial instruments.
Interest rate swaps and other financial instruments
are also used to hedge interest rate risks on invest-
ments.
20.3 - Commodity price risk
In its manufacturing operations, the Group uses metals
such as copper, silver, aluminum, nickel and zinc that
are traded on the commodity markets. The risk of fluc-
tuations in the market prices of these metals is hedged
using futures, swaps and options.
20.4 - Nominal value and market value of off-balance sheet financial instruments
(in millions of euros)
December 31, 2004 December 31, 2003
Nominal Market Nominal Market
value value value value
Perpetual bond rate swaps 475.3 (55.7) 443.5 (83.1)
Other swaps, caps and collars 117.5 (3.3) 916.9 (5.0)
Forward purchases
and sales of foreign currencies 101.8 10.2 414.2 63.9
Currency options and other hedges 162.6 3.6 161.0 9.1
Metal price futures and options 75.7 7.7 39.2 (9.0)
Derivative instruments 932.9 (37.5) 1 974.8 (24.1)
The fair value of financial instruments is estimated either internally or by third party banks.
The nominal value of options is determined by adding together the absolute values of put and call options.
In the case of collars, the nominal value is only taken into account once.