This excerpt taken from the PDA 6-K filed Jul 10, 2009.
Our use of derivative financial instruments may negatively affect our operations, especially in a volatile and uncertain market.
We have used, and we expect to continue to use, derivative financial instruments to manage the risk profile associated with interest rates and currency exposure of our debt, to reduce our financing costs, to access alternative sources of financing and to hedge some of our financial risks. For the year ended December 31, 2008, we had a net loss of approximately R$2,365.8 million (U.S.$1,012.3 million) from financial instruments as compared to a net gain of R$191.6 million (U.S.$108.2 million) in 2007. These losses resulted from a variety of factors (some of which are further described in "Legal ProceedingsCivil Litigation"), including losses related to changes in the fair value of cross currency swaps and other currency derivatives attributable to the variation of the U.S. dollar against the Brazilian real and certain activities of the former finance officer. To the extent that any of these factors persist in 2009, we may continue to incur net losses from our derivative financial instruments.
Furthermore, the fair value of derivative instruments fluctuates over time as a result of the effects of future interest rates, exchange rates and financial market volatility. These values must be analyzed in relation to the fair values of the underlying transactions and as part of our overall exposure to fluctuations in interest rates and foreign exchange rates. Since valuation is imprecise and variable, it is difficult to accurately predict the magnitude of the risk posed by our use of derivative financial instruments going forward and to state with certainty that we will not be negatively affected by our derivative financial positions.
Companies experienced a period of greater volatility in the global financial and securities markets as part of the worsening of the financial institutions' crisis which started in 2007. The financial crisis significantly and negatively affected the valuation of our derivative instruments portfolio, primarily the valuation of foreign exchange options and currency derivatives related to debt. As a result of increased volatility and devaluation of the real against the U.S. dollar, there were significant changes in the fair value of our derivative instruments portfolio, which triggered the need to make deposits in margin accounts with the counterparties and to incur additional indebtedness to make margin deposits or to settle some of these derivative transactions, negatively affecting our liquidity.