Arrow Electronics 2010 Annual Report Download - page 44

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The company is exposed to market risk from changes in foreign currency exchange rates and interest
rates.
Foreign Currency Exchange Rate Risk
The company, as a large, global organization, faces exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices evolve and could
materially impact the company's financial results in the future. The company's primary exposure relates to
transactions in which the currency collected from customers is different from the currency utilized to
purchase the product sold in Europe, the Asia Pacific region, Canada, and Latin America. The company's
policy is to hedge substantially all such currency exposures for which natural hedges do not exist. Natural
hedges exist when purchases and sales within a specific country are both denominated in the same
currency and, therefore, no exposure exists to hedge with foreign exchange forward, option, or swap
contracts (collectively, the "foreign exchange contracts"). In many regions in Asia, for example, sales and
purchases are primarily denominated in U.S. dollars, resulting in a "natural hedge." Natural hedges exist
in most countries in which the company operates, although the percentage of natural offsets, as
compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to
country. The company does not enter into foreign exchange contracts for trading purposes. The risk of
loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the
company minimizes by limiting its counterparties to major financial institutions. The fair values of the
foreign exchange contracts, which are nominal, are estimated using market quotes. The notional amount
of the foreign exchange contracts at December 31, 2010 and 2009 was $297.9 million and $294.9 million,
respectively.
The translation of the financial statements of the non-United States operations is impacted by fluctuations in
foreign currency exchange rates. The change in consolidated sales and operating income was impacted by
the translation of the company's international financial statements into U.S. dollars. This resulted in reduced
sales and increased operating income of $127.1 million and $1.5 million, respectively, for 2010, compared
with the year-earlier period, based on 2009 sales and operating income at the average rate for 2010. Sales
and operating income would decrease by approximately $565.7 million and $25.5 million, respectively, if
average foreign exchange rates had declined by 10% against the U.S. dollar in 2010. These amounts were
determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating
income of the company's international operations.
In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2011, for
approximately $100.0 million or €78.3 million. In October 2005, the company entered into a cross-
currency swap, with a maturity date of October 2010, for approximately $200.0 million or €168.4 million.
These cross-currency swaps were designated as net investment hedges and hedged a portion of the
company's net investment in euro-denominated net assets, by effectively converting the interest expense
on $300.0 million of long-term debt from U.S. dollars to euros. During 2010, the company paid $2.3
million, plus accrued interest, to terminate these cross-currency swaps. The cross-currency swaps had a
negative fair value at December 31, 2009 of $54.4 million.
Interest Rate Risk
The company’s interest expense, in part, is sensitive to the general level of interest rates in North
America, Europe, and the Asia Pacific region. The company historically has managed its exposure to
interest rate risk through the proportion of fixed-rate and floating-rate debt in its total debt portfolio.
Additionally, the company utilizes interest rate swaps in order to manage its targeted mix of fixed- and
floating-rate debt.
At December 31, 2010, approximately 57% of the company’s debt was subject to fixed rates, and 43% of
its debt was subject to floating rates. A one percentage point change in average interest rates would not
materially impact net interest and other financing expense in 2010. This was determined by considering