Carnival Cruises 2007 Annual Report Download - page 44

CARNIVAL CORPORATION & PLC | 41
functional currency of the cruise brand that is expected to be
operating the ship. These foreign currency commitments are
affected by fluctuations in the value of the functional currency
as compared to the currency in which the shipbuilding con-
tract is denominated. We use foreign currency swaps and
nonderivative financial instruments to manage foreign currency
exchange rate risk from some of our ship construction con-
tracts (see Notes 2, 6 and 10 in the accompanying financial
statements). Accordingly, increases and decreases in the fair
value of these foreign currency swaps offset changes in the fair
value of the foreign currency denominated ship construction
commitments, thus resulting in the elimination of such risk.
Specifically, we have foreign currency swaps for one of our
Euro-denominated shipbuilding contracts and a portion of
another shipbuilding contract. At November 30, 2007, the fair
value of these foreign currency swaps was an unrealized gain
of $13 million which is recorded, along with an offsetting $13
million fair value liability related to our shipbuilding firm com-
mitments, on our accompanying 2007 balance sheet. Based
upon a 10% strengthening or weakening of the Sterling and
U.S. dollar compared to the Euro as of November 30, 2007,
assuming no changes in comparative interest rates, the
estimated fair value of these foreign currency swaps would
decrease or increase by $66 million, which would be offset
by a decrease or increase of $66 million in the U.S. dollar
value of the related foreign currency ship construction com-
mitments resulting in no net dollar impact to us.
In addition, we have €296 million of cash equivalents that
are designated as a fair value hedge for a portion of a ship
that is expected to operate in a U.S. dollar functional currency
brand, which has resulted in a $44 million firm commitment
gain. Based upon a 10% strengthening or weakening of the
U.S. dollar compared to the Euro cash equivalent balance as
of November 30, 2007, assuming no changes in comparative
interest rates, the estimated fair value of this cash equivalent
balance would decrease or increase by $44 million, which
would be offset by a decrease or increase of $44 million in the
U.S. dollar balance of the related foreign currency ship con-
struction commitment resulting in no net dollar impact to us.
At November 30, 2007, we have six Euro-denominated
shipbuilding commitments (for delivery between June 2009
and May 2011) aggregating €2.16 billion assigned to three of
our U.S. dollar functional currency brands for which we have
not entered into any foreign currency swaps. Therefore, the
U.S. dollar cost of these ships will increase or decrease based
upon changes in the exchange rate until the payments are
made under the shipbuilding contracts or we enter into foreign
currency hedges. A portion of our net investment in Euro-
denominated cruise operations effectively act as an economic
hedge against a portion of these Euro commitments. Accord-
ingly, a portion of any increase or decrease in our ship costs
resulting from changes in the exchange rates will be offset
by a corresponding change in the net assets of our Euro-
denominated cruise operations. Based upon a 10% hypotheti-
cal increase or decrease in the November 30, 2007 U.S. dollar
to the Euro foreign currency exchange rate, the cost of these
ships would decrease or increase by $320 million.
In addition, at November 30, 2007 we have two Euro-
denominated shipbuilding commitments (for delivery in March
and September 2010) aggregating €1.05 billion assigned to
two of our Sterling functional currency brands for which we
have not entered into any foreign currency swaps. Therefore,
the Sterling cost of these ships will increase or decrease
based upon changes in the exchange rate until the payments
are made under the shipbuilding contracts or we enter into
foreign currency hedges. Since the Euro to Sterling exchange
rate has traded in a narrow band for most of the last three
years, we have not yet hedged these Euro-denominated
commitments. Based upon a 10% hypothetical increase or
decrease in the November 30, 2007 Sterling to Euro foreign
currency exchange rate, assuming the U.S. dollar exchange
rate remains constant, the cost of these ships would decrease
or increase by $155 million.
Our decisions regarding whether or not to hedge a given
ship commitment are made on a case-by-case basis, taking
into consideration the amount and duration of the exposure,
market volatility, exchange rate correlation, economic trends
and other offsetting risks.
The cost of shipbuilding orders that we may place in the
future for our cruise lines who generate their cash flows in a
currency that is different than the shipyard’s operating currency,
generally the Euro, is expected to be affected by foreign cur-
rency exchange rate fluctuations. Given the decline in the
U.S. dollar relative to the Euro over the past several years, the
U.S. dollar cost to order new cruise ships at current exchange
rates has increased significantly. If the U.S. dollar remains at
current levels or declines further, this may affect our ability
to order future new cruise ships for U.S. dollar functional
currency brands.
We consider our investments in foreign subsidiaries to be
denominated in relatively stable currencies and of a long-term
nature. In addition to the net investment hedging strategy dis-
cussed above, we also partially address these net investment
currency exposures by denominating a portion of our debt