HP 2015 Annual Report Download - page 85

Table of Contents
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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. 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 value for each of these exposures is 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 foreign currency
exchange rate and interest 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.
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We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases and assets and
liabilities denominated in currencies other than the U.S. dollar. We transact business in approximately 79 currencies worldwide, of which the most significant
foreign currencies to our operations for fiscal 2015 were the euro, the British pound, Chinese yuan renminbi and the Japanese yen. 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 at times, 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 risk
associated with our foreign currency exposures, primarily if such exposure acts as a natural hedge for offsetting amounts denominated in the same currency or
if the currency is too difficult or too expensive to hedge.
We have performed sensitivity analyses as of October 31, 2015 and 2014, 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 derivative 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, 2015 and 2014. 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 $72 million and $62 million at October 31,
2015 and October 31, 2014, respectively.
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We also are exposed to interest rate risk related to debt we have issued and our investment portfolio 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 often use interest rate and/or
currency swaps to modify the market risk exposures in connection with the debt to achieve U.S. dollar LIBOR-based floating interest expense.
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Source: HP INC, 10-K, December 16, 2015 Powered by Morningstar® Document Research℠
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