DOCSLIB.ORG

14. Hedging Activities

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
14. Hedging Activities Notes to Consolidated Financial Statements Environmental Litigation liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants. Corning has been named by the Environmental Protection Agency At December 31, 2019 and 2018, Corning had accrued approximately (the Agency) under the Superfund Act, or by state governments under $41 million (undiscounted) and $30 million (undiscounted), respectively, similar state laws, as a potentially responsible party for 15 active for the estimated liability for environmental cleanup and related hazardous waste sites. Under the Superfund Act, all parties who may litigation. Based upon the information developed to date, management have contributed any waste to a hazardous waste site, identified by the believes that the accrued reserve is a reasonable estimate of the Agency, are jointly and severally liable for the cost of cleanup unless Company’s liability and that the risk of an additional loss in an amount the Agency agrees otherwise. It is Corning’s policy to accrue for its materially higher than that accrued is remote. estimated liability related to Superfund sites and other environmental 14. Hedging Activities Corning is exposed to interest rate and foreign currency risks due to the Corning uses regression analysis or critical term match method movement of these rates. to assess initial hedge effectiveness. Following the inception of a hedging relationship, hedge effectiveness is assessed quarterly based The areas in which exchange rate fluctuations affect us include: on qualitative factors. Corning defers gains and losses related to the • Financial instruments and transactions denominated in foreign cash flow hedges into accumulated other comprehensive loss on the currencies, which impact earnings; and consolidated balance sheets until the hedged item impacts earnings. At December 31, 2019, the amount expected to be reclassified into earnings • The translation of net assets in foreign subsidiaries for which the within the next 12 months is a pre-tax net gain of $30 million. functional currency is not the U.S. dollar, which impacts our net equity. Our most significant foreign currency exposures relate to the Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan, the euro Undesignated Hedges and British pound. We seek to mitigate the impact of exchange rate Corning also uses OTC foreign exchange forward and option contracts movements in our income statement by using over-the-counter (OTC) that are not designated as hedged instruments. These contracts are derivative instruments including foreign exchange forward and option used to offset economic currency risks. The undesignated hedges limit contracts. In general, these hedge expirations coincide with the timing exposures to foreign functional currency fluctuations related to certain of the underlying foreign currency commitments and transactions. subsidiaries’ monetary assets, monetary liabilities and net earnings in We are exposed to potential losses in the event of non-performance by foreign currencies. our counterparties to these derivative contracts. However, we minimize A significant portion of the Company’s non-U.S. revenues and expenses this risk by maintaining our portfolio with a diverse group of highly-rated are denominated in Japanese yen, South Korean won, new Taiwan major financial institutions. We do not expect to record any losses as a dollar, Chinese yuan and euro. When these revenues and expenses result of such counterparty default. Neither we nor our counterparties are translated back to U.S. dollars, the Company is exposed to foreign are required to post collateral for these financial instruments. The exchange rate movements. To protect translated earnings against Company qualified for and elected the end-user exception to the movements in these currencies, the Company has entered into a series mandatory swap clearing requirement of the Dodd-Frank Act. of average rate forwards and other derivative instruments. The Company continued its foreign exchange hedge program in 2019 Cash Flow Hedges and entered into a series of average rate forwards, and purchased put or call options. These will hedge a significant portion of its projected yen Our cash flow hedging activities utilize OTC foreign exchange forward exposure for the period of 2020-2023. As of December 31, 2019, the U.S. contracts to reduce the risk that movements in exchange rates will dollar gross notional value of the yen average rate forwards program is adversely affect the net cash flows resulting from the sale of products to $7.7 billion and $2.5 billion for zero-cost collars and purchased put or call customers and purchases from suppliers. The total gross notional values options. The average rate forward program was also expanded to partially for foreign currency cash flow hedges are $2.1 billion and $0.4 billion at hedge the impact of the South Korean won, Chinese yuan, euro, new December 31, 2019 and 2018, respectively. The majority of our foreign Taiwan dollar and British pound translation on the Company’s projected exchange forward contracts hedge a portion of the Company’s exposure net income. As of December 31, 2019, these average rate forwards have to the Japanese yen denominated sales with maturities spanning a total notional value of $2.0 billion. The entire average rate forward the years 2020-2023 and with gross notional values of $1.5 billion at program will settle net without obligation to deliver Japanese yen, December 31, 2019. South Korean won, Chinese yuan, euro and British pound. With respect CORNING REPORT 2019 ANNUAL Our cash flow hedging activity also uses interest rate derivatives to the zero-cost collars, the gross notional amount includes the value of including Treasury rate lock agreements to reduce the risk of increases both put and call options. However, due to the nature of the zero-cost in benchmark interest rates on the probable issuance of debt. In the collars, only the put or the call option can be exercised at maturity. second quarter of 2018, the Company entered into Treasury rate lock The fair values of these derivative contracts are recorded as either assets agreements to hedge against the variability in cash flows due to changes (gain position) or liabilities (loss position) on the consolidated balance in the benchmark interest rate related to an anticipated debt issuance. sheets. Changes in the fair value of the derivative contracts are recorded The instruments were designated as cash flow hedges, and were settled currently in earnings in the translated earnings contract gain (loss), net on October 31, 2018 concurrent with the debt issuance. The settlement line of the consolidated statements of income (loss). amount of $16 million received is released from accumulated other comprehensive income into earnings when the corresponding interest expense occurs each period. 68 69.
Load more

Recommended publications
  • This Offering Memorandum Constitutes an Offering of the Securities
    This Offering Memorandum constitutes an offering of the securities described herein in all provinces and territories of Canada and only to whom they may be lawfully offered for sale and is not, and under no circumstances is to be construed as, a prospectus or public offering of such securities or advertisement relating to units of the funds described herein. No securities commission or similar authority in Canada has in any way passed upon the merits of the securities offered hereunder nor has it reviewed this Offering Memorandum and any representation to the contrary is an offence. As there is no market for these securities, it may be difficult or even impossible for investors to sell these securities. They may sell them only pursuant to an exemption prescribed by the securities legislation of their particular province or territory or with a prospectus or with the granting of an exemption. The securities, however, may be redeemed in accordance with the provisions of this offering memorandum. ARROW DIVERSIFIED FUND BROADVIEW DARK HORSE LONG/SHORT FUND CURVATURE MARKET NEUTRAL FUND EAST COAST INVESTMENT GRADE II FUND HIRSCH PERFORMANCE FUND LAZARD GLOBAL CREDIT FUND LAZARD GLOBAL CREDIT II FUND SG U.S. MARKET NEUTRAL FUND _______________________________ Offering Memorandum _______________________________ January 29, 2016 TABLE OF CONTENTS GLOSSARY OF TERMS .....................................................................................................................................................................................................
    [Show full text]
  • Foreign Exchange Rate Risk in Microfinance
    FocusNote NO. 31 JANUARY 2006 FOREIGN EXCHANGE RATE RISK IN MICROFINANCE: WHAT IS IT AND HOW CAN IT BE MANAGED? Introduction Many borrowing microfinance institutions (MFIs) are not adequately managing their The authors of this Focus Note exposure to foreign exchange rate risk. There are at least three components of foreign are Scott Featherston, consult- exchange rate risk: (1) devaluation or depreciation risk, (2) convertibility risk, and (3) ant, Elizabeth Littlefield, CEO transfer risk. CGAP, and Patricia Mwangi, microfinance specialist, CGAP. Devaluation or depreciation risk typically arises in microfinance when an MFI acquires debt in a foreign currency, usually U.S. dollars (USD) or euros, and then lends CGAP, the Consultative Group those funds in domestic currency (DC). The MFI then possesses a liability in a hard to Assist the Poor, is a currency and assets in a DC (in which case, an MFI’s balance sheet is said to contain a consortium of 31 development agencies that support “currency mismatch”). Fluctuations in the relative values of these two currencies can microfinance. More information adversely affect the financial viability of the organization. is available on the CGAP Convertibility risk is another possible component of foreign exchange risk. For the Web site: www.cgap.org. purposes of this note, convertibility risk refers to the risk that the national government will not sell foreign currency to borrowers or others with obligations denominated in hard currency. Transfer risk refers to the risk that the national government will not allow foreign currency to leave the country regardless of its source. Since MFIs operate in developing countries where the risk of currency depreciation is highest, they are particularly vulnerable to foreign exchange rate risk.
    [Show full text]
  • Analysis of Exchange Rate Risk & Hedging Strategies
    Analysis of Exchange Rate Risk & Hedging Strategies - Study on Dutch Listed Firms Author: Akash Kumar (11133317) Contact: [email protected] Supervisor: Prof. Jeroen Ligterink Program: Amsterdam MBA (Full Time – 2016-17) Analysis of Exchange Rate Risk & Hedging Strategies ABSTRACT Currency risk arises from a combination of foreign currency exposure and volatility in foreign currency exchange rate with respect to domestic currency. As the firms may experience considerable exposure to foreign exchange rate risk because of foreign currency based activities and international competition. Many currencies are volatile as they show high fluctuations in the value due to various factors, such as trading speculation, change in global political and economic scenario, policy of central banks and many other factors. To minimize the effect of exchange rate risk, many firms use hedging techniques to over exposed risk, which may help to minimize the effects of exchange rate risk. In this paper, some hedging strategies will be discussed, for minimizing the firm’s exposure due to exchange rate fluctuations and test whether hedging diminishes the firm’s exposure. We analyse the relationship between the change of exchange rate and stock returns of 17 Dutch firms over a period of 10 years (2006-2016). We find that 41% of the firms are significantly exposed to exchange rate risk. We also examined the relationship between the coefficient of exchange rate exposure and foreign currency derivatives used by the firm to hedge the currency exposure. We were not able to any significant relationship between coefficient of exchange rate exposure and foreign currency derivatives. CONTENTS Abstract List of Abbreviations I.
    [Show full text]
  • Modelling the US Dollar Trading Range Bounds from the Risk Neutral Measure
    Modelling the US Dollar Trading Range Bounds from the risk neutral measure David W. Maybury Defence Economics Team DRDC CORA TM 2013-086 June 2013 Defence R&D Canada Centre for Operational Research and Analysis Defence Economics Team Assistant Deputy Minister (Finance and Corporate Services) National Défense Defence nationale Modelling the US Dollar Trading Range Bounds from the risk neutral measure David W. Maybury Defence Economics Team Defence R&D Canada – CORA Technical Memorandum DRDC CORA TM 2013-086 June 2013 Principal Author Original signed by David W. Maybury David W. Maybury Approved by Original signed by R.M.H. Burton R.M.H. Burton Section Head (Joint Systems Analysis) Approved for release by Original signed by P. Comeau P. Comeau Chief Scientist c Her Majesty the Queen in Right of Canada as represented by the Minister of National Defence, 2013 c Sa Majesté la Reine (en droit du Canada), telle que représentée par le ministre de la Défense nationale, 2013 Abstract ADM(Fin CS) and senior decision makers at the Department of National Defence (DND) require insight into financial risks stemming from foreign exchange obligations in procure- ments and program delivery. We implement three popular derivative based quantitative financial models which provide the conditional Canada-US exchange rate trading range, under the risk neutral distribution, within a 95% confidence region up to a one year hori- zon. ADM(Fin CS) can use the model inferred trading range to help decide on a hedging rule in connection with foreign exchange budget obligations. Our results give a useful thumbnail sketch of the underlying probability distribution and confidence regions but, to gain a better understanding of foreign exchange market conditions, we require access to over-the-counter derivative data.
    [Show full text]
  • Managing Risk Across the Red Meat Supply Chain
    A PRACTICAL GUIDE TO MANAGING FINANCIAL MARKET RISK ACROSS THE RED MEAT SUPPLY CHAIN PROJECT CODE: 2018-1142 PREPARED BY: Sean Mulhearn DATE SUBMITTED: June 30, 2019 DATE PUBLISHED: TBA PUBLISHED BY: Jacaranda Capital Partners Pty Ltd The Australian Meat Processor Corporation acknowledges the matching funds provided by the Australian Government to support the research and development detailed in this publication. Disclaimer: The information contained within this publication has been prepared by a third party commissioned by Australian Meat Processor Corporation Ltd (AMPC). It does not necessarily reflect the opinion or position of AMPC. Care is taken to ensure the accuracy of the information contained in this publication. However, AMPC cannot accept responsibility for the accuracy or completeness of the information or opinions contained in this publication, nor does it endorse or adopt the information contained in this report. No part of this work may be reproduced, copied, published, communicated or adapted in any form or by any means (electronic or otherwise) without the express written permission of Australian Meat Processor Corporation Ltd. All rights are expressly reserved. Requests for further authorisation should be directed to the Executive Chairman, AMPC, Suite 1, Level 5, 110 Walker Street North Sydney NSW. TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................................................. 2 1.0 EXECUTIVE SUMMARY .....................................................................................................
    [Show full text]
  • BIS Papers No 90 Foreign Exchange Liquidity in the Americas
    BIS Papers No 90 Foreign exchange liquidity in the Americas Report submitted by a study group established by the BIS CCA Consultative Group of Directors of Operations (CGDO) and chaired by Susan McLaughlin, Federal Reserve Bank of New York Monetary and Economic Department March 2017 JEL classification: F31, G15 The views expressed are those of the authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2017. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 978-92-9259-035-2 (print) ISSN 1682-7651 (online) ISBN 978-92-9259-034-5 (online) Contents Executive summary ................................................................................................................................ iii Liquidity metrics ............................................................................................................................. iii Liquidity conditions ...................................................................................................................... iii Factors influencing liquidity conditions ............................................................................... iii I. Introduction ...................................................................................................................................... 1 II. Liquidity metrics and trends .....................................................................................................
    [Show full text]
  • Foreign Exchange Market and Exchange Rates
    Unit -3 Foreign exchange market and exchange rates By- Parthapratim Choudhury Asst. Prof. Dept. Of economics M.C. College, Barpeta 1. What are the main functions of Foreign Exchange Market ? Ans: Foreign Exchange Market is the market where the buyers and sellers are involved in the buying and selling of foreign currencies. In other words , the market in which the currencies of different countries are bought and sold is called as a foreign exchange market. A foreign exchange market performs three important functions relating to the buying and selling of foreign currencies. These are discussed below. a) Transfer Function: The basic function of the foreign exchange market is to transfer purchasing power between countries, i.e., to facilitate the conversion of one currency into another. It basically includes the conversion of one currency to another, wherein the role of FOREX is to transfer the purchasing power from one country to another. The international clearing function performed by foreign exchange markets plays a very important role in facilitating international trade and capital movement. The transfer function is performed through a use of credit instruments, such as bank drafts, bills of foreign exchange, and telephone transfers b) Credit Function: Foreign Exchange Markets provide a short-term credit to the importers so as to facilitate the smooth flow of goods and services from country to country. Exporters may get pre shipment and post shipment credit. Credit facilities are available also for importers. An importer can use credit to finance the foreign purchases. Bills of exchange used in the international payments normally have a maturity period of three months.Thus, credit is required for that period to enable the importer to take possession of goods, sell them and obtain money to pay off the bill.
    [Show full text]
  • The Effect of Hedging on Firm Value and Performance: Evidence from the Nonfinancial UK Firms Hany Ahmed*, Alcino Azevedo *, Yilm
    The Effect of Hedging on Firm Value and Performance: Evidence from the Nonfinancial UK Firms Hany Ahmed*, Alcino Azevedo1,*, Yilmaz Guney* *Hull University Business School Cottingham Road, Hull HU6 7RX, UK Abstract We examine the effect of hedging with financial derivatives on firm value and financial performance, relying on a new dataset which comprises information on 288 nonfinancial firms listed in the FTSE-All share index at the London Stock Exchange (LSE) over the time period of 2005-2012. We focus on the hedging of the foreign exchange, interest rate and commodity price risks with futures, forward, option and swap contracts. Our findings show that the effectiveness of the risk management practices varies significantly across the financial risks and the derivative used for hedging. For instance, we find that the relationship between interest rate risk hedging and firm financial performance is negative for the overall hedging but positive for the hedging with forward contracts. Some of our results contradict previous findings reported in the literature which suggest that there is a positive association between hedging and firm value and financial performance. Also, we find that the 2008-2009 financial crisis did not affect significantly the established risk management practices and firm’s commitment to financial risk hedging with derivatives. JEL CLASSIFICATION: G3, F4, F3. Keywords: Derivatives, Hedging, Nonfinancial, Performance, Value, Risk management. 1 Corresponding author: e-mail: [email protected], tel.: +44(0)1482463107, fax: +44(0)1482463484. 1. Introduction Strategic risk management has grown in importance in the last decades, moving from pure risk mitigation to value creation.
    [Show full text]
  • A New Perspective for the Use of Financial Derivatives to Hedge Foreign Exchange Rate
    Revista Activos ISSN: 0124-5805 ISSN: 2500-5278 [email protected] Universidad Santo Tomás Colombia A new perspective for the use of financial derivatives to hedge foreign exchange rate: L-BFGS perspective to assess the strikes and principals of plain vanilla options Hernández, Willie; Borray Benavides, Jairo A new perspective for the use of financial derivatives to hedge foreign exchange rate: L-BFGS perspective to assess the strikes and principals of plain vanilla options Revista Activos, vol. 17, no. 2, 2019 Universidad Santo Tomás, Colombia Atribución (CC BY) 4.0 PDF generated from XML JATS4R Artículos A new perspective for the use of financial derivatives to hedge foreign exchange rate: L-BFGS perspective to assess the strikes and principals of plain vanilla options Willie Hernández [email protected] Universidad Santo Tomás, Colombia Jairo Borray Benavides [email protected] Universidad Sergio Arboleda, Colombia Abstract: e international relationships between nations and economic agents have Revista Activos, vol. 17, no. 2, 2019 evolved so rapidly that the services and products are being traded almost instantly. Nevertheless, a great amount of these services and products are quoted in different Universidad Santo Tomás, Colombia currencies; thus, it is necessary the use of financial products to trade these products and Received: 29 May 2019 services without incurring in unnecessary risks. e use of financial derivatives in the Accepted: 23 July 2019 financial market has been increasing over the last decade. Moreover, foreign exchange derivatives have become an essential tool for companies to hedge their exposure in a foreign exchange currency. Nonetheless, there has not been enough research about CC BY methodologies that emphasize in the mixing of strategies.
    [Show full text]
  • Derivative and Hedge Accounting
    FACT SHEET Derivative and Hedge Accounting KYRIBA FACT SHEET Derivative and Hedge Accounting Kyriba delivers exposure management, mark-to-market and hedge accounting solutions to support corporate hedging programs and better facilitate regulatory compliance. Overview With Kyriba, regulatory compliance for FASB, IAS, ASC and IFRS derivative Risk Management Modules accounting standards are no longer an issue. Kyriba offers a comprehensive • Foreign exchange solution that delivers the depth and complexity modern organizations require to • Foreign exchange valuations effectively manage hedging programs and complying with regulatory standards. • Foreign exchange accounting • Foreign exchange hedge accounting Kyriba employs a team of hedging and derivative accounting experts so that your • Interest rate derivatives compliance requirements are met. The collective knowledge from our subject • Interest rate valuations matter experts helps you meet regulatory standards. • Interest rate derivatives accounting • Interest rate hedge accounting Kyriba is the only treasury and finance solution to offer hedge accounting, cash management, payments, global connectivity and comprehensive reporting on a single platform. Other providers offer multiple technologies to achieve what Kyriba delivers in a single cloud portal. Kyriba’s solution simplifies the support for your hedging program, but offers premium product performance, managed upgrades and eliminates IT dependencies. kyriba.com • 1-855-KYRIBA-0 Kyriba’s valuation engine allows clients to mark-to-market their entire portfolio without performance degradation, even when running at peak times. Hedge Definition If you don’t elect to pursue hedge accounting, Kyriba’s integrated Kyriba offers a step-by-step workflow to define the hedge for accounting engine will calculate and journalize the change in accounting purposes, including: fair value to your income statement accounts.
    [Show full text]
  • Dynamic Hedging and the Interest Rate Defense
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Microstructure of Foreign Exchange Markets Volume Author/Editor: Jeffrey A. Frankel, Giampaolo Galli, Alberto Giovannini, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-26000-3 Volume URL: http://www.nber.org/books/fran96-1 Conference Date: July 1-2, 1994 Publication Date: January 1996 Chapter Title: Dynamic Hedging and the Interest Rate Defense Chapter Author: Peter M. Garber, Michael G. Spencer Chapter URL: http://www.nber.org/chapters/c11366 Chapter pages in book: (p. 209 - 228) Dynamic Hedging and the Interest Rate Defense Peter M. Garber and Michael G. Spencer Hand in glove with the internationalization of portfolios and the interlinking of money markets across currencies has been the expanded use of methods to hedge currency risk. The rapid proliferation of hedging techniques and the reduction in communication and transactions costs have proceeded simultane- ously with these trends. While basic hedging instruments such as forward ex- change contracts have a long history, the use of newer instruments such as exchange-traded options and futures contracts and over-the-counter (OTC) op- tions and currency swaps has grown dramatically in the past decade. In addi- tion, option-pricing methods have been used in dynamic hedging strategies to construct tailor-made synthetic derivative products—a transplantation to cur- rency markets of the portfolio insurance methods used to hedge equity mar- ket exposure. The crash of 1987 led to justifiable skepticism about the ability of mechanis- tic trading strategies like dynamic hedging actually to deliver the intended hedge protection when markets are illiquid.1 In addition, these strategies have been criticized for their tendency to exacerbate price trends.
    [Show full text]
  • The Pension Sector As a Foreign Exchange Market Participant
    THE PENSION SECTOR AS A FOREIGN EXCHANGE MARKET PARTICIPANT Martin Dencker Raffnsøe, Financial Statistics, and Jakob Roager Jensen and Anders Larsen, Economics and Monetary Policy INTRODUCTION AND SUMMARY Danish pension wealth has grown substantially panies, even small changes in the hedge ratio in recent years, and Danish pension companies’ impact the foreign exchange market. balance sheets now total approximately 175 per The sector’s liabilities have shifted from guar- cent of GDP.1 Half of the sector’s balance sheet is anteed products towards market rate products in placed in foreign assets. Consequently, pension recent years. In this way, the individual pension companies’ investment and risk hedging decisions saver directly bears a larger share of the pension have a considerable impact on the foreign ex- saving risk. Companies with large shares of market change market. rate products tend to rely less on hedging of ex- As a result of the regulation of pension com- change rate risk. The hedge ratio is expected to panies and the credibility of Denmark’s fixed fall in step with the gradual transition to market exchange rate policy, pension companies’ level rate products. Hedging of the foreign exchange of hedging of foreign exchange risks tends to be exposure varies greatly across pension companies. considerably smaller in euro than in other curren- Given the large and expanding net foreign cies such as dollars. assets, the Danes have an overall foreign ex- During certain episodes in 2015 and 2016, the change exposure. This also entails that, all else pension companies increased their hedging of equal, the exchange rate of the krone appreciates exchange rate risks in euro in connection with tur- if investors in foreign assets do not want the for- moil in the European financial markets.
    [Show full text]