DuPont 2006 Annual Report Download - page 55

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk, continued
From time to time, the company will enter into forward exchange contracts to establish with certainty the USD
amount of future firm commitments denominated in a foreign currency. Decisions regarding whether or not to
hedge a given commitment are made on a case-by-case basis taking into consideration the amount and
duration of the exposure, market volatility and economic trends. Forward exchange contracts are also used,
from time to time, to manage near-term foreign currency cash requirements and to place foreign currency
deposits and marketable securities investments.
Interest Rate Risk
The company uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related
overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest payments to effectively convert fixed
rate debt into floating rate debt based on three- or six-month USD LIBOR. Interest rate swaps allow the
company to maintain a target range of floating rate debt.
Commodity Price Risk
The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge its
exposure to price fluctuations on certain raw material purchases.
A portion of energy feedstock purchases are hedged to reduce price volatility using fixed price swaps and
options. Hedged feedstock purchases include natural gas and ethane.
The company contracts with independent growers to produce finished seed inventory. Under these contracts,
growers are compensated with bushel equivalents that are marketed to the company for the market price of
grain for a period of time following harvest. Derivative instruments, such as commodity futures that have a
high correlation to the underlying commodity, are used to hedge the commodity price risk involved in
compensating growers.
The company utilizes agricultural commodity futures to manage the price volatility of soybean meal. These
derivative instruments have a high correlation to the underlying commodity exposure and are deemed effective
in offsetting soybean meal feedstock price risk.
Additional details on these and other financial instruments are set forth in Note 25 to the Consolidated
Financial Statements.
55
Part II