Financial instruments

27. Financial instruments

The current assets comprise:

  • Euros 56,116 thousand (Euros 26,553 thousand at December 31, 2006) relating to the fair value measurement of forward currency purchases and sales in place at December 31, 2007. These are derivative transactions which, although used for hedging purposes, are not designated as such under IFRS. The fair value is determined by using the forward exchange rate at the balance sheet date;
  • Euros 2,210 thousand (Euros 2,594 thousand at December 31, 2006) relating to the fair value measurement of interest rate derivatives put into place by Pirelli Real Estate: in particular, the amount at December 31, 2007 refers entirely to the fair value measurement of an interest rate plain vanilla collar which qualifies for hedge accounting under IAS 39 (Euros 1,661 thousand at December 31, 2006).

Pirelli & C. Real Estate S.p.A. put into place a plain vanilla collar derivative with notional amount of Euros 120 million to hedge the committed and revolving credit line draw down constantly and with interest due quarterly (therefore similar in the aggregate to a payable of Euros 120 million at a floating rate repayable by a one-off payment).

The objective of the above hedge is to stabilize future cash flows payable to service debt, acquiring protection against possible increases in the interest rate curve.

In particular, the derivative limits exposure by guaranteeing payments in a pre-set range of between 2.20 percent and 3.75 percent.

In order to avoid fluctuations in the income for the year due to volatility caused by changes in fair value, hedge accounting has been adopted in accordance with IAS 39. Hedge accounting is applied only to the intrinsic value while the time value change is recognized in the income statement.

The amount recognized in equity at December 31, 2007 is a positive Euros 875 thousand (a positive Euros 1,050 thousand at December 31, 2006).

The amounts included in non-current assets (equal to Euros 3,849 thousand), current liabilities (equal to Euros 72,513 thousand, Euros 45,362 thousand at December 31, 2006) and non-current liabilities (equal to Euros 6,782 thousand, Euros 4,751 thousand at December 31, 2006) refer to the fair value measurement of forward currency purchases and sales existing at December 31, 2007.