6. Derivative Financial Instruments

The Company's foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currency resulting from changes in foreign currency exchange rates. The Company's foreign currency hedging program uses both forward contracts and currency options to manage the foreign currency exposures that exist as part of its ongoing business operations.

Cash Flow Hedges

The Company hedges a portion of its intercompany sales of inventory over a maximum period of 15 months using forward foreign exchange contracts accounted for as cash flow hedges to mitigate the impact of volatility associated with foreign currency transactions.

For forward foreign exchange contracts that are designated as cash flow hedges, if they are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives value are not included in current earnings but are included in other comprehensive income in stockholders' equity. The changes in fair value will subsequently be reclassified into earnings as a component of cost of revenues, as applicable, when the forecasted transaction occurs. To the extent that a previously forecasted transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period it occurs. The Company does not enter into derivative instruments for trading or speculative purposes. Realized gains and losses resulting from these cash flow hedges offset the foreign exchange gains and losses on the underlying transactions being hedged. Gains and losses on derivatives not designated for hedge accounting or representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

At September 30, 2010, the Company had forward contracts outstanding to hedge cash flow exposure at the Company's wholly-owned Austrian subsidiary, AMSC Windtec GmbH ("AMSC Windtec"), with aggregate USD equivalent notional amounts of $34.4 million. These contracts expired at various dates through June 2011. The net gain or loss from these cash flow hedges reported in accumulated other comprehensive income will be reclassified to earnings and recorded in cost of revenues in our unaudited condensed consolidated statement of income when the related inventory is sold to third-party customers.

Balance Sheet Hedges

In addition to cash flow hedges, the Company also enters into foreign currency forward exchange contracts to mitigate the impact of foreign exchange risk related to non-functional currency receivable balances in its foreign entities. The Company does not elect hedge accounting treatment for these hedges, consequently, changes in the fair value of these contracts are recorded within other income (expense), net, in the period which they occur. At September 30, 2010, the Company had forward contracts outstanding with aggregate USD equivalent notional amounts of $58.9 million, which expired in October 2010.

The fair value amounts of asset derivatives included in prepaid expenses and other current assets and liability derivatives included in accounts payable and accrued expenses in our unaudited condensed consolidated balance sheets related to forward foreign exchange contracts as of September 30, 2010 and March 31, 2010 were as follows (in thousands):


	Asset derivatives						Liability derivatives
	September 30, 2010			March 31, 2010			September 30, 2010		March 31, 2010
Derivatives designated as cash flow hedges	$		1,561	$	—	$		—	$	—
Derivatives not designated as cash flow hedges		889			168			—		—

Total	$		2,450	$	168	$		—	$	—

The Company recognized the following pre-tax gains related to forward foreign exchange contracts designated as cash flow hedges (in thousands):


	Three months ended				Six months ended
	September 30, 2010		September 30, 2009		September 30, 2010		September 30, 2009
Gains recognized in other comprehensive income	$	1,950	$	—	$	1,758	$	—

The Company recognized the following pre-tax gains related to forward foreign exchange contracts not designated as cash flow hedges (in thousands):


	Three months ended				Six months ended
	September 30, 2010		September 30, 2009		September 30, 2010		September 30, 2009
Gains recognized in other expense, net	$	7,994	$	403	$	3,975	$	139
Gains recognized in cost of revenues		440	$	—		440	$	—
Total	$	8,434	$	403	$	4,415	$	139