Hertz 2009 Annual Report Download - page 109

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Consistent with the terms of the agreements governing the respective debt obligations, we may hedge a
portion of the floating rate interest exposure under the Senior Credit Facilities, the U.S. and International
Fleet Debt and International ABS Fleet Financing Facility to provide protection in respect of such
exposure.
Foreign Currency Risk
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and
financing expenses in the local currency in the countries in which we operate, including making fleet and
equipment purchases and borrowing for working capital needs. Also, we have purchased foreign
exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing
programs. The effect of exchange rate changes on these financial instruments would not materially
affect our consolidated financial position, results of operations or cash flows. Our risks with respect to
foreign exchange options are limited to the premium paid for the right to exercise the option and the
future performance of the option’s counterparty. Premiums paid for options outstanding as of
December 31, 2009, were approximately $0.1 million, and we limit counterparties to financial institutions
that have strong credit ratings. As of December 31, 2009 and December 31, 2008, the fair value of all
outstanding foreign currency options was approximately $0.0 million and $0.5 million, respectively,
which was recorded in our consolidated balance sheet in ‘‘Prepaid expenses and other assets.’’ The fair
value of the foreign currency options was calculated using a discounted cash flow method and applying
observable market data. Gains and losses resulting from changes in the fair value of these options are
included in our results of operations.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of
our subsidiaries by entering into foreign currency forward contracts at the time of the loans. The forward
rate is reflected in the intercompany loan rate to the subsidiaries, and as a result, the forward contracts
have no material impact on our results of operations.
In connection with the Transactions, we issued e225 million of Senior Euro Notes. On October 1, 2006,
we designated our Senior Euro Notes as an effective net investment hedge of our Euro-denominated net
investment in our international operations. As a result of this net investment hedge designation, as of
December 31, 2009 and December 31, 2008, losses of $19.2 million (net of tax of $17.8 million) and
$15.7 million (net of tax of $12.6 million), respectively, attributable to the translation of our Senior Euro
Notes into the U.S. dollar are recorded in our consolidated balance sheet in ‘‘Accumulated other
comprehensive loss.’’
See Note 12 to the Notes to our consolidated financial statements included in this Annual Report under
the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Other Risks
We purchase unleaded gasoline and diesel fuel at prevailing market rates. In January 2009, we began a
program to manage our exposure to changes in prices through the use of derivative commodity
instruments. See Note 12 to the Notes to our consolidated financial statements included in this Annual
Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Inflation
The increased cost of vehicles is the primary inflationary factor affecting us. Many of our other operating
expenses are also expected to increase with inflation, including health care costs and gasoline.
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