ArcelorMittal South Africa 2007 Annual Report Page 160
32. FINANCIAL INSTRUMENTS continued
32.11
Commodity risk managed by embedded derivatives
Embedded derivative instruments
Number of
instruments
Active
hedging
indices
Expiry
date(s)
Fair
value
Rm
Recognised
fair value
gains/(loss)
Rm
Group and company
For the year ended
31 December 2007
Energy – pricing cap
1
SA PPI, Steel
Industry Index,
US PPI, Heavy
Fuel Oil Index
(1)
218
19
Raw material – pricing forward
1
SA PPI
Ref. Note (ii)
(29)
Refractory services – pricing forward
1
Exchange rate(2)
Ref. Note (iii)
(23)
Total
218
(33)
For the year ended
31 December 2006
Energy – pricing cap
1
SA PPI, Steel
Industry Index,
US PPI, Heavy
Fuel Oil Index
(1)
199
134
Raw material – pricing forward
1
SA PPI
Dec 08
29
(8)
Refractory services – pricing forward
1
Exchange rate(2)
Dec 09
23
19
Total
251
145
(1)
No expiring date defined in contract.
(2)
USD: ZAR
(i) Energy – pricing cap
The capped pricing component of the embedded derivative was modelled on an intrinsic value basis. The value of the
derivative is the difference between the expected market-based cash flows and expected contract-based cash flows.
As market prices are a factor of industry segment and purchased gas volume, management has used its best estimate
to determine market-based prices applicable to customers in the same industry as the company, with similar
purchased gas volumes.
(ii) Raw material – pricing forward
The forward contract within the embedded derivative was solved for a fair value of zero at inception. Management’s
estimated increases in SA PPI at inception were applied to the estimated volumes for the duration of the contract at
inception. The change in the fair value of the forward contract was determined by applying management’s revised
increase estimations at subsequent valuation dates to the volume estimations, and calculating the difference between
the initial estimated cash flows and the revised estimates.
Notes to the group and company annual financial statements continued
for the year ended 31 December 2007
