29 Financial instruments
Foreign exchange and interest rate risk management
Commodity risk management
Ahold reviews and monitors its exposure and risks related to changes in exchange rates, interest rates and commodity
rates, and Ahold utilizes derivative financial instruments, including swaps, options and forward contracts, to manage these
exposures. These instruments are not considered specialized or high-risk and are generally available from numerous sources.
Ahold enters into contracts to hedge economic risks and does not enter into contracts or utilize derivatives for speculative
purposes. The terms of the financial instruments utilized are consistent with the related underlying hedged exposures.
Established controls are in place covering all financial instruments. These include policies, guidelines and a system of
authorization and reporting. All contracts have been entered with major creditworthy financial institutions, and the risk
associated with these transactions is the cost of replacing these agreements at the current market rates, in the event of
default by the counter parties. The Company does not have a significant concentration of risk with any single party in any
of its financial instruments. Management regularly evaluates its use of financial instruments and believes that the risk of
incurring losses as a result of default is remote.
All derivative financial instruments are entered into for economic hedging purposes, but for various reasons, certain
instruments may not qualify for hedge accounting treatment. In order for a derivative financial instrument to qualify as a
hedge for accounting purposes, the instrument must be effective in hedging the underlying designated risk, meaning that
changes in the fair value of the hedging instrument substantially offset the change in the fair value of the hedged item or
forecasted transaction attributable to that risk element.
To the extent that derivative instruments are designated and qualify as hedges under applicable hedge accounting rules,
the fair values of these instruments are not included in the Company's balance sheet; rather, any associated gains or losses
on the instruments are deferred and are recognized in the statement of operations in the same period in which the
underlying hedged exposure affects earnings. Instruments that are not designated as hedges, or that fail to qualify for
hedge accounting, are included in the Company's balance sheet at fair value, with changes in value recognized in current
period income.
Ahold had 66 financial derivative contracts outstanding as of the end of 2002. The notional contract quantities as of
December 31, 2002 and 2001 were EUR 4,681 and EUR 4,710, respectively, with a market value of EUR 47 in 2002
and negative EUR 363 in 2001. Of these 66 contracts, 44 have a maturity shorter then one year, 17 have a maturity of
one to five years and five have a maturity ranging from five to thirty years. Some of Ahold's derivatives agreements require
it to maintain specific financial ratios, the breach of which could result in cross-acceleration and cross-defaults under the
terms of other derivatives instruments and debt agreements.
Since Ahold has operations in a variety of countries throughout the world, a substantial portion of its assets, liabilities and
results are denominated in foreign currencies, primarily the US dollar. As a result, the Company is subject to foreign
currency exchange risk due to exchange rate movements, which affect Ahold's transaction costs and the translation of the
results and underlying net assets of its foreign subsidiaries. Ahold actively manages foreign currency exposure by financing
in local currency borrowings to the extent possible or practical. Using this hedging technique, Ahold manages its overall
debt portfolio to match asset investments on a country-by-country basis. When local financing is not possible or practical,
the Company will finance foreign operations through intercompany loans. Ahold has been able to substantially mitigate
foreign currency exposure with local borrowings or by entering into cross-currency swaps to hedge third-party debt in a
currency other then the functional currency of the entity.
Ahold uses a combination of interest rate, cross-currency and foreign currency exchange swaps to hedge variable rate
exposures resulting from changes in interest rates and foreign currency exchange rates on borrowings in currencies other
than the functional currency. Ahold's objective in managing exposures to interest rate and foreign exchange rate
fluctuations on debt is to reduce income and cash flow volatility. Ahold's financial position is largely fixed by long-term
debt issues and derivative financial instruments. Interest rate swaps allow the Company to maintain a target range of
floating debt.
Ahold uses commodity forwards and futures to hedge against fuel price risk. Some commodity contracts are closed out and
cash settled at maturity while for other contracts the underlying exposure is physically delivered. As of December 29,
2002, Ahold had 10 contracts (fiscal 2001: 7 contracts) outstanding for a notional amount of 14 gallons (fiscal 2001:
15 gallons) and a fair value of EUR 1 (fiscal 2001: EUR (3)).
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