HP 2013 Annual Report Download - page 82

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to foreign currency exchange rate and interest
rate risks that could impact our financial position and results of operations. Our risk management
strategy with respect to these 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 and foreign currency exchange rate movements and
our actual exposures and derivatives in place at the time of the change, as well as the effectiveness of
the derivative to hedge the related exposure.
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 75 currencies worldwide, of which the most
significant foreign currencies to our operations for fiscal 2013 were the euro, the Japanese yen, Chinese
yuan renminbi 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 of the foreign currency, a
weaker U.S. dollar may adversely affect certain expense figures, if 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 and intercompany loans 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 consisting primarily of forward contracts to hedge foreign currency balance sheet
exposures. Alternatively, we may choose not to hedge the foreign currency risk associated with our
foreign currency exposures, primarily 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, 2013 and 2012, 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 underlying
exposures. The foreign currency exchange rates we used in performing the sensitivity analysis were
based on market rates in effect at October 31, 2013 and 2012. The sensitivity analyses indicated that a
hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign
exchange fair value loss of $80 million and $71 million at October 31, 2013 and October 31, 2012,
respectively.
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 often use interest rate and/or currency swaps to modify the market risk
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