Latin Finance - June 2008 - 53

treasury and cash management FX Hedging GOL’s operations are exposed to changes in the Real-Dollar FX rate due to lease, maintenance, insurance and booking system costs. Although the airline pays for jet fuel purchases in Brazilian Reais, the local price of jet fuel is also linked to the FX rate. To hedge this FX exposure, GOL uses exchange-traded Dollar-Real futures and options. One key aspect of hedging the dollar-real exchange rate is the large forward basis incurred, which is a consequence of the large interest rate differential between the two currencies. Currently, the local carrying cost of dollars against Reais is around 8% per year. This imposes high hedging costs for firms seeking to protect themselves against a real devaluation. FX hedging decisions take into account such costs, and rely largely on options to mitigate them. This results in the possibility that, for a given period of time, the hedge amount of the international WTI price embedded in the jet fuel exposure may differ from the hedge amount of the FX rate exposure embedded in local jet fuel pricing. informed about its risk management decisions. Disclosure of hedge activities is an important part of GOL’s hedging program. It adhered to SFAS 133 rules of hedge accounting early in 2005, and extended them to financial reporting to Brazilian investors. The designation of GOL’s derivatives as hedge instruments for accounting and disclosure purposes allows the airline to match the timing of the gain or loss in the derivatives with that of the recognition of the respective expense. To qualify for hedge accounting, a derivative must be linked to a specific exposure and pass a number of tests, practically ruling out any chance of speculation. The use of hedge accounting made hedge effectiveness a core concern, since hedge accounting can only be applied to highly effective hedges. Interest Rate Hedging Interest rate exposure is measured in “basis point value”, meaning the present value of the increases in future interest expenses due to a 0.01% parallel increase in interest rates. GOL uses interest rate swaps and swap locks to hedge interest rate exposure in a transaction basis. Compliance and Control Controlling derivatives positions is a critical aspect of any hedge program. Many hedge initiatives suffer a loss of confidence – possibly leading to discontinuation – if the company has to meet unexpected margin calls or mark-tomarket revaluations. At GOL, derivatives were marked to market from the first transaction. GOL has the ability to mark its derivatives portfolio to market every day, and the value of assets or liabilities represented by its derivatives are always known. To comply with SFAS 133 and the requirements of section 404 of the Sarbanes-Oxley Law of 2002, GOL created a set of controls that ensure that all components of financial information regarding its derivatives positions are properly accounted. These controls span over transaction capture and documentation, position recordkeeping, instrument valuation, hedge effectiveness assessment and measurement, derivatives and hedge accounting, and financial data flow to financial statements. Accounting and Disclosure An important aspect of GOL’s hedge program is its disclosure to investors. Investors in airline stocks know that the value of their investments may decline if fuel costs rise, but they lack the means to predict exactly how, and to what extent. In cases like these, the company’s management acts in the best interest of shareholders by reducing earnings volatility through hedges, provided that it keeps investors Organizational and Governance Framework The market risk management function at GOL is carried out at the governance level by a senior Risk Policies Committee (RPC) that determines the company’s risk appetite. It does so through an evaluation of probable impacts of market variables on earnings and cash flow. The RPC meets quarterly and is composed of one board member, an independent expert and the CFO. It is responsible for analyzing market price movements and income statement impacts. It also evaluates the last quarter’s hedging policy effectiveness, and decides whether to keep or change the current hedging policy into the next quarter. At the executive level, a Risk Management Committee meets weekly and is responsible for determining the actions needed to execute derivatives transactions according to pre-approved strategies. Conclusion Strategic risk management represents a tremendous opportunity for a company to set itself ahead of the competition by reducing the risk that it represents for stakeholders and placing itself as the premier choice for suppliers, employees, financing providers, and business partners. For GOL, risk management is a key aspect of corporate governance. To perform risk management, derivatives instruments are often needed as tools for risk transfer. However, derivatives are relatively new instruments, and adequate procedures must be put in place to control them. Strong discipline and regard for the principles that direct risk management are keys for ensuring the right use of derivatives and the success of any risk management program. I GOL Linhas Aéreas Inteligentes S.A. Richard F. Lark, Jr., EVP and Chief Financial Officer Email: rlark@golnaweb.com.br Website: www.voegol.com.br 2008 LATINFINANCE 53 guide

http://www.voegol.com.br http://www.voegol.com.br

Latin Finance - June 2008

Table of Contents for the Digital Edition of Latin Finance - June 2008