Question

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings of the counterparties and the use of master netting and reciprocal collateralization agreements.
Master netting agreements apply in situations where the Company executes multiple con-tracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative con-tracts, this would result in a loss to the Company of $ 50 million as of January 1, 2011.
For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or our counterparties exceeds a certain amount. There were no collateral balance requirements at January 1, 2011.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 30% of consolidated trade receivables at January 1, 2011.

Required
a. In some situations, the company executes multiple contracts with the same counterparty. Indicate the loss as of January 1, 2011 if those counterparties fail to perform according to the terms of derivative contracts.
b. What were the collateral balance requirements at January 1, 2011?
c. The company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Why does management believe the risk is limited? d. Why does management believe that concentrations of credit risk with respect to accounts receivable is limited?



$1.99
Sales0
Views114
Comments0
  • CreatedMay 28, 2014
  • Files Included
Post your question
5000