Graco 2007 Annual Report Download - page 39

Newell Rubbermaid Inc. 2007 Annual Report
37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company’s market risk is impacted by changes in interest rates, foreign currency exchange rates and certain commodity prices. Pursuant to the
Company’s policies, natural hedging techniques and derivative financial instruments may be utilized to reduce the impact of adverse changes in market
prices. The Company does not hold or issue derivative instruments for trading purposes.
The Company manages interest rate exposure through its conservative debt ratio target and its mix of fixed and floating rate debt. Interest rate swaps
may be used to adjust interest rate exposures when appropriate based on market conditions, and, for qualifying hedges, the interest differential of swaps is
included in interest expense.
The Company’s foreign exchange risk management policy emphasizes hedging anticipated intercompany and third party commercial transaction
exposures of one-year duration or less. The Company focuses on natural hedging techniques of the following form: 1) offsetting or netting of like foreign
currency flows, 2) structuring foreign subsidiary balance sheets with appropriate levels of debt to reduce subsidiary net investments and subsidiary cash
flows subject to conversion risk, 3) converting excess foreign currency deposits into U.S. dollars or the relevant functional currency and 4) avoidance of risk
by denominating contracts in the appropriate functional currency. In addition, the Company primarily utilizes forward contracts and purchased options to
hedge commercial and intercompany transactions. Gains and losses related to qualifying hedges of commercial and intercompany transactions are deferred
and included in the basis of the underlying transactions. Derivatives used to hedge intercompany loans are marked to market with the corresponding gains
or losses included in the Company’s Consolidated Statements of Income.
The Company purchases certain raw materials, including resin, corrugate, steel, stainless steel, aluminum and other metals, which are subject to
price volatility caused by unpredictable factors. While future movements of raw material costs are uncertain, a variety of programs, including periodic raw
material purchases, purchases of raw materials for future delivery and customer price adjustments help the Company address this risk. Where practical,
the Company uses derivatives as part of its risk management process.
The amounts shown below represent the estimated potential economic loss that the Company could incur from adverse changes in either interest
rates or foreign exchange rates using the value-at-risk estimation model. The value-at-risk model uses historical foreign exchange rates and interest rates
to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques that
are based on a variance/covariance approach and includes substantially all market risk exposures (specifically excluding equity-method investments). The
fair value losses shown in the table below have no impact on results of operations or financial condition, but are shown as an illustration of the impact of
potential adverse changes in interest and foreign currency exchange rates. The following table indicates the calculated amounts for each of the years ended
December 31, 2007 and 2006 (dollars in millions):
2007 December 31, 2006 December 31, Confidence
Market Risk (1) Average 2007 Average 2006 Level
Interest rates $8.8 $10.2 $8.0 $7.5 95%
Foreign exchange $4.9 $7.1 $5.0 $3.5 95%
(1) Commodity price risk is not shown because the amounts are not material.
The 95% confidence interval signifies the Company’s degree of confidence that actual losses would not exceed the estimated losses shown above.
The amounts shown here disregard the possibility that interest rates and foreign currency exchange rates could move in the Company’s favor. The value-
at-risk model assumes that all movements in these rates will be adverse. Actual experience has shown that gains and losses tend to offset each other
over time, and it is highly unlikely that the Company could experience losses such as these over an extended period of time. These amounts should not be
considered projections of future losses, because actual results may differ significantly depending upon activity in the global financial markets.