Consolidated Financial Statements and Notes - Brookfield Asset ...

The company endeavours to maintain a matched book of currencies and interest rates. However, unmatched positions are carried,on occasion, within predetermined exposure limits. These limits are reviewed on a regular basis and the company believes theexposures are manageable and not material in relation to its overall business operations.The notional amount of the company’s derivative positions at the end of 2005 and 2004 are as follows:MILLIONS Note Units 2005 2004Foreign exchange (a) US$ $ 1,450 $ 5,369Interest rates (b) US$ 1,240 2,079Credit default swaps (c) US$ 797 —Equity derivatives (d) US$ 604 106Commodity instruments (energy) (e) GWh 6.7 5.5(a) Foreign ExchangeAt December 31, 2005, the company held foreign exchange contracts with a notional amount of $1,113 million (2004 – $2,911 million)at an average exchange rate of $1.280 (2004 – $1.270) to manage its Canadian dollar exposure. At December 31, 2005, thecompany held foreign exchange contracts with a notional amount of $337 million (2004 – $574 million) at an average exchangerate of $1.784 (2004 – $1.904) to manage its British pounds exposure. All of the foreign exchange contracts at December 31, 2005had a maturity of less than two years.At December 31, 2004, the company’s Canadian dollar functional subsidiaries held U.S. dollar foreign exchange contracts witha notional amount of $1,884 million at an average exchange rate of $1.249. All foreign exchange contracts held by the company in2005 and 2004 were carried in the company’s accounts at market value. No such contracts were held by the company’s Canadiandollar functional subsidiaries as at December 31, 2005.Included in 2005 income are net gains on foreign currency amounting to $76 million (2004 – losses of $3 million) and included in thecumulative translation adjustment account are gains net of taxes in respect of foreign currency contracts entered into for hedgingpurposes amounting to $11 million (2004 – losses of $154 million), which offset translation gains on the underlying net assets.(b) Interest RatesAt December 31, 2005, the company also held interest rate swap contracts having a notional amount of $840 million (2004 –$1,300 million) with a replacement value in excess of that recorded in the company’s accounts of $13 million (2004 – $32 million).These contracts expire over a 10-year period.At December 31, 2005, the company’s subsidiaries held interest rate swap contracts having a notional amount of $400 million(2004 – $779 million). These interest rate swap contracts were comprised of contracts with a replacement cost in excess of thatrecorded in the company’s accounts of $nil (2004 – $5 million), and contracts with a replacement value in excess of that recordedin the company’s accounts of $nil (2004 – $5 million).(c) Credit Default SwapsAs at December 31, 2005, the company was counterparty to credit default swaps with an aggregate notional amount of $797 million2004 – $nil). Credit default swaps are over-the-counter contracts which are designed to compensate the purchaser for anydeterioration in value of an underlying reference asset upon the occurrence of predetermined credit events. The company is entitledto receive payment in the event of a predetermined credit event for up to $775 million of the notional amount and could be requiredto make payment in respect of $22 million of the notional amount.(d) Equity DerivativesAt December 31, 2005, the company held equity derivatives with a notional amount of $604 million (2004 – $106 million) recordedin the balance sheet at an amount equal to replacement value. Approximately one-half of the notional amount represents a hedgeof long-term compensation arrangements and the balance represents common equity positions established in connection withthe company’s capital markets investment activities. The replacement values of these instruments were refl ected in the company’sconsolidated fi nancial statements at year end.Brookfield Asset Management | 2005 Annual Report 83