HP 2007 Annual Report Download - page 83

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks
that could impact our financial position and results of operations. Our risk management strategy with respect to these three
market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing
underlying exposures of HP. Accordingly, we do not use derivative contracts for speculative purposes. Our risks, risk
management strategy and a sensitivity analysis estimating the effects of changes in fair values for each of these exposures are
outlined below.
Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing
and amount of interest rate, foreign currency exchange rate and equity price movements and our actual exposures and hedges.
Foreign currency exchange rate risk
We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated
purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in
approximately 40 currencies worldwide, of which the most significant to our operations for fiscal 2007 were the euro, the
Japanese yen and the British pound. For most currencies, we are a net receiver of the foreign currency and therefore benefit
from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency. Even where
we are a net receiver, a weaker U.S. dollar may adversely affect certain expense figures taken alone. We use a combination of
forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks
inherent in our forecasted net revenue and, to a lesser extent, cost of sales denominated in currencies other than the U.S.
dollar. In addition, when debt is denominated in a foreign currency, we may use swaps to exchange the foreign currency
principal and interest obligations for U.S. dollar-denominated amounts to manage the exposure to changes in foreign
currency exchange rates. We also use other derivatives not designated as hedging instruments under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” consisting primarily of forward contracts to hedge foreign
currency balance sheet exposures. We recognize the gains and losses on foreign currency forward contracts in the same
period as the remeasurement losses and gains of the related foreign currency-denominated exposures. Alternatively, we may
choose not to hedge the foreign currency risk associated with our foreign currency exposures if such exposure acts as a
natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or
too expensive to hedge.
We have performed sensitivity analyses as of October 31, 2007 and 2006, using a modeling technique that measures the
change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates
relative to the U.S. dollar, with all other variables held constant. The analyses cover all of our foreign currency contracts
offset by the underlying exposures. The foreign currency exchange rates we used were based on market rates in effect at
October 31, 2007 and 2006. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency
exchange rates would result in a foreign exchange loss of $104 million at both October 31, 2007 and October 31, 2006.
Interest rate risk
We also are exposed to interest rate risk related to our debt and investment portfolios and financing receivables. We issue
long-term debt in either U.S. dollars or foreign currencies based on market conditions at the time of financing. We then
typically use interest rate and/or currency swaps to modify the market risk exposures in connection with the debt to achieve
primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve the exchange of fixed
for
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