Carnival Cruises 2014 Annual Report Download - page 69

Quantitative and Qualitative Disclosures About Market Risk
For a discussion of our hedging strategies and market risks, see the discussion below and Note 10 – “Fair Value
Measurements, Derivative Instruments and Hedging Activities” in the consolidated financial statements.
Foreign Currency Exchange Rate Risks
Operational Currency Risks
We have foreign operations that have functional currencies other than the U.S. dollar, which result in foreign
currency translational impacts. Our operations execute transactions in a number of currencies different than their
functional currencies, principally the euro, sterling and Australian and U.S. dollars, which result in foreign
currency transactional impacts. Based on a 10% hypothetical change in all currency exchange rates that were
used in our December 19, 2014 guidance, we estimate that our 2015 first quarter and full year December 19,
2014 non-GAAP guidance would change by $0.04 per share and $0.30 per share, respectively, including both the
foreign currency translational and transactional impacts.
Investment Currency Risks
We have $403 million of foreign currency forwards that are designated as hedges of our net investments in
foreign operations, which have a euro-denominated functional currency, thus partially offsetting this foreign
currency exchange rate risk. Based on a 10% hypothetical change in the U.S. dollar to euro exchange rate as of
November 30, 2014, we estimate that these foreign currency forwards’ fair values would change by $40 million,
which would be offset by a corresponding change of $40 million in the U.S. dollar value of our net investments.
Newbuild Currency Risks
In 2012, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion
of P&O Cruises (UK) Britannia’s euro-denominated shipyard payments. These collars mature in February 2015
at a weighted-average ceiling of $287 million and a weighted-average floor of $266 million. In 2014, we entered
into foreign currency zero cost collars that are also designated as cash flow hedges for the remaining unhedged
portion of Britannia’s euro-denominated shipyard payments. These collars also mature in February 2015 at a
weighted-average ceiling of $281 million and a weighted-average floor of $274 million. If the spot rate is
between the weighted average ceiling and floor rates on the date of maturity, then we would not owe or receive
any payments under these collars. At November 30, 2014, the estimated fair value of these outstanding foreign
currency zero cost collars was a nominal liability. Based on a 10% hypothetical increase or decrease in the
November 30, 2014 sterling rates to euro exchange rates, we estimate the fair value of these collars would
increase $26 million or decrease $27 million, respectively.
On January 22, 2015, we entered into foreign currency zero cost collars that are designated as cash flow hedges
for a portion of a Princess and Seabourn newbuilds’ euro-denominated shipyard payments. The Princess
newbuild’s collars mature in March 2017 at a weighted-average ceiling of $590 million and a weighted-average
floor of $504 million. The Seabourn newbuild’s collars mature in November 2016 at a weighted-average ceiling
of $221 million and a weighted-average floor of $185 million. If the spot rate is between the weighted-average
ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under these
collars.
At January 22, 2015, substantially all of our remaining newbuild currency exchange rate risk relates to euro-
denominated newbuild construction payments for a Carnival Cruise Line, Holland America Line and Seabourn
newbuild, which represent a total unhedged commitment of $1.7 billion. The functional currency cost of each of
these ships will increase or decrease based on changes in the exchange rates until the payments are made under
the shipbuilding contract, or we enter into a foreign currency hedge. Based on a 10% hypothetical change in the
U.S. dollar to euro exchange rates as of November 30, 2014, the unpaid cost of these ships would have a
corresponding change of $171 million.
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