Halliburton 2011 Annual Report Download - page 81

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66
FINANCIAL INSTRUMENT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange rates and interest rates.
We selectively manage these exposures through the use of derivative instruments, including forward
exchange contracts and interest rate swaps. The objective of our risk management strategy is to minimize
the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments
for trading purposes. The counterparties to our forward exchange contracts and interest rate swaps are
global commercial and investment banks.
There are certain limitations inherent in the sensitivity analyses presented, primarily due to the
assumption that interest rates and exchange rates change instantaneously in an equally adverse fashion. In
addition, the analyses are unable to reflect the complex market reactions that normally would arise from the
market shifts modeled. While this is our best estimate of the impact of the various scenarios, these
estimates should not be viewed as forecasts.
Foreign currency exchange risk
We have operations in many international locations and are involved in transactions denominated
in currencies other than the United States dollar, our functional currency, which exposes us to foreign
currency exchange rate risk. Techniques in managing foreign currency exchange risk include, but are not
limited to, foreign currency borrowing and investing and the use of currency derivative instruments. We
attempt to selectively manage significant exposures to potential foreign currency exchange losses based on
current market conditions, future operating activities, and the associated cost in relation to the perceived
risk of loss. The purpose of our foreign currency risk management activities is to minimize the risk that our
cash flows from the sale and purchase of services and products in foreign currencies will be adversely
affected by changes in exchange rates.
We use forward exchange contracts to manage our exposure to fluctuations in the currencies of the
countries in which we do the majority of our international business. These forward exchange contracts are
not treated as hedges for accounting purposes, generally have an expiration date of one year or less, and are
not exchange traded. While forward exchange contracts are subject to fluctuations in value, the fluctuations
are generally offset by the value of the underlying exposures being managed. The use of some of these
contracts may limit our ability to benefit from favorable fluctuations in foreign currency exchange rates.
Forward exchange contracts are not utilized to manage exposures in some currencies due primarily
to the lack of available markets or cost considerations (non-traded currencies). We attempt to manage our
working capital position to minimize foreign currency exposure in non-traded currencies and recognize that
pricing for the services and products offered in these countries should account for the cost of exchange rate
devaluations. We have historically incurred transaction losses in non-traded currencies.
The notional amounts of open forward exchange contracts were $268 million at December 31,
2011 and $356 million at December 31, 2010. The notional amounts of our forward exchange contracts do
not generally represent amounts exchanged by the parties, and thus are not a measure of our exposure or of
the cash requirements related to these contracts. As such, cash flows related to these contracts are typically
not material. The amounts exchanged are calculated by reference to the notional amounts and by other
terms of the contracts, such as exchange rates.
We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign
currency exchange rates against the United States dollar. A hypothetical 10% adverse change in the value
of all our foreign currency positions relative to the United States dollar as of December 31, 2011 would
result in a $61 million pre-tax loss for our net monetary assets denominated in currencies other than United
States dollars.