General Dynamics 2015 Annual Report Download - page 39

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk, primarily from foreign currency
exchange rates, interest rates, commodity prices and investments. See
Note M to the Consolidated Financial Statements in Item 8 for a
discussion of these risks. The following quantifies the market risk
exposure arising from hypothetical changes in foreign currency
exchange rates and interest rates.
Foreign Currency. We had notional forward foreign exchange
contracts outstanding of $7.2 billion on December 31, 2015, and $9.1
billion on December 31, 2014. A 10 percent unfavorable exchange
rate movement in our portfolio of foreign currency forward contracts
would have resulted in the following hypothetical, incremental pretax
losses:
2015 2014
Recognized $ (8) $ (25)
Unrecognized (652) (823)
This exchange-rate sensitivity relates primarily to changes in the
U.S. dollar/Canadian dollar, euro/Canadian dollar and euro/British
pound exchange rates. These losses would be offset by corresponding
gains in the remeasurement of the underlying transactions being
hedged. We believe these forward contracts and the offsetting
underlying commitments, when taken together, do not create material
market risk.
Interest Rate Risk. Our financial instruments subject to interest
rate risk include fixed-rate long-term debt obligations and variable-rate
commercial paper. On December 31, 2015, we had $3.4 billion par
value of fixed-rate debt and no commercial paper outstanding. Our
fixed-rate debt obligations are not putable, and we do not trade these
securities in the market. A 10 percent unfavorable interest rate
movement would not have a material impact on the fair value of our
debt obligations.
Investment Risk. Our investment policy allows for purchases of
fixed-income securities with an investment-grade rating and a
maximum maturity of up to five years. On December 31, 2015, we
held $2.8 billion in cash and equivalents, but held no marketable
securities.
General Dynamics Annual Report 2015 35