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PSEM » Topics » 10. Fair Value of Financial Instruments

This excerpt taken from the PSEM 8-K filed Nov 23, 2005.

10. Fair Value of Financial Instruments

 

  a. The purposes and strategies of using derivative financial instruments:

 

The Company uses derivatives to manage risks related to exchange rate fluctuations. Forward contract was designated as exchange rate hedge purposes. The company’s exchange rate risk management strategy is to stabilize the exchange gains on losses incurred from the market. By entering into reverse transactions, the risk exposure is minimized.

 

  b. Credit risk:

 

Credit risk means the possible loss that may be incurred in the event that the counter parties default. As the counterparties of the Company are all financial institutions with good credit ratings, credit risk is considered to be remote.

 

  c. Market risk:

 

Forward contract is used to hedge fluctuations in currency rates. The gains or losses on the effective portion of the hedge are reclassified into earning when amount on the related debtor credit is paid or received.

 

  d. As of December 31, 2003, assets and liabilities related to the aforementioned contracts were recorded as receivables from forward exchange contracts (included in the “other current assets” account) and details were listed below.

 

     Amount
  

Payables on forward exchange contracts-foreign currency

    $ 3,111,000  

Receivables from forward exchange contracts

      (3,116,000 )

Discount on payables on forward exchange contracts-foreign currency

      5,000  
    

Receivables from forward exchange contracts

    $ —    
    

 

There was no such transaction in 2004.

 

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