Derivative Instruments and Hedging Activities |
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Derivative Instruments and Hedging Activities | Note 12—Derivative Instruments and Hedging Activities Interest Rate Risks The Company’s exposure to interest rate risk relates primarily to outstanding variable rate debt and adverse movements in the related market rates. Typically, the most significant component of the Company’s interest rate risk relates to amounts outstanding under the 2019 Credit Agreement and the 2019 Term Loan. Foreign Exchange Rate Risk Management The Company generates a substantial portion of its revenues and expenses in international markets, principally Germany and other countries in the European Union and Switzerland, which subjects its operations to the exposure of exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period. The Company periodically enters into foreign currency contracts in order to minimize the volatility that fluctuations in currency translation have on its monetary transactions. Under these arrangements, the Company typically agrees to purchase a fixed amount of a foreign currency in exchange for a fixed amount of U.S. Dollars or other currencies on specified dates with maturities of less than twelve months, with some agreements extending to longer periods. These transactions do not qualify for hedge accounting and, accordingly, the instrument is recorded at fair value with the corresponding gains and losses recorded in the consolidated statements of income and comprehensive income. The Company had the following notional amounts outstanding under foreign exchange contracts and cross-currency interest rate swap agreements at December 31, (in millions):
In addition, the Company periodically enters into purchase and sales contracts denominated in currencies other than the functional currency of the parties to the transaction. The Company accounts for these transactions separately valuing the “embedded derivative” component of these contracts. The contracts, denominated in currencies other than the functional currency of the transacting parties, amounted to $12.3 million for the delivery of products and $6.1 million for the purchase of products at December 31, 2019 and $113.5 million for the delivery of products and $6.0 million for the purchase of products at December 31, 2018. These purchase and sale contracts are not designated as accounting hedges. The changes in the fair value of these embedded derivatives are recorded in interest and other income (expense), net in the consolidated statements of income and comprehensive income. Commodity Price Risk Management The Company has an arrangement with a customer under which it has a firm commitment to deliver copper based superconductors at a fixed price. In order to minimize the volatility that fluctuations in the price of copper have on the Company’s sales of these commodities, the Company enters into commodity hedge contracts. These commodity contracts are not designated as accounting hedges. At December 31, 2019 and 2018, the Company has fixed price commodity contracts with notional amounts aggregating $5.6 million and $6.8 million, respectively. The changes in the fair value of these commodity contracts are recorded in interest and other income (expense), net in the consolidated statements of income and comprehensive income. The fair value of the derivative instruments described above were recorded in the consolidated balance sheets for the years ended December 31, 2019 and 2018 as follows (dollars in millions):
The impact on net income of unrealized gains and losses resulting from changes in the fair value of derivative instruments for the years ending December 31 are as follows (dollars in millions) and are recorded within interest and other income (expense), net in the consolidated statements of income and comprehensive income:
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