Hertz 2010 Annual Report Download - page 156

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subsidiary purchased an interest rate cap for $0.5 million, with a maximum notional amount equal to the
Australian Securitization maximum principal amount of A$250 million, a strike rate of 7% and expected
maturity date of December 2012. Additionally, Hertz sold a 7% interest rate cap, for $0.4 million with a
matching notional amount and term to the Australian operating subsidiary’s interest rate cap. The fair
values of all interest rate caps were calculated using a discounted cash flow method and applying
observable market data (i.e. the 1-month LIBOR yield curve and credit default swap spreads). Gains and
losses resulting from changes in the fair value of these interest rate caps are included in our results of
operations in the periods incurred.
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 fuel prices through the use of derivative commodity
instruments. We currently have in place swaps to cover a portion of our fuel price exposure through June
2011. We presently hedge a portion of our overall unleaded gasoline and diesel fuel purchases with
commodity swaps and have contracts in place that settle on a monthly basis. As of December 31, 2010,
our outstanding commodity instruments for unleaded gasoline and diesel fuel totaled approximately
8.4 million gallons and 0.2 million gallons, respectively. The fair value of these commodity instruments
was calculated using a discounted cash flow method and applying observable market data (i.e., NYMEX
RBOB Gasoline and U.S. Department of Energy surveys, etc.). Gains and losses resulting from changes
in the fair value of these commodity instruments are included in our results of operations in the periods
incurred.
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, 2010, were approximately $0.1 million. We limit counterparties to the transactions to
financial institutions that have strong credit ratings. As of December 31, 2010 and 2009, the total notional
amount of these foreign exchange options was $3.5 million and $0.3 million, respectively. As of
December 31, 2010, these foreign exchange options mature through January 2012. The fair value of the
foreign exchange options was calculated using a discounted cash flow method and applying observable
market data (i.e. foreign currency exchange rates). Gains and losses resulting from changes in the fair
value of these options are included in our results of operations in the periods incurred.
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 which are
intended to offset the impact of foreign currency movements on the underlying intercompany loan
obligations. As of December 31, 2010, the total notional amount of these forward contracts was
$721.8 million, maturing within three months. The fair value of these foreign currency forward contracts
was calculated based on foreign currency forward exchange rates.
On October 1, 2006, we designated our 7.875% Senior Notes due 2014 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, 2010 and 2009, losses of $6.8 million (net of tax of
$5.1 million) and $19.2 million (net of tax of $17.8 million), respectively, attributable to the translation of
our 7.875% Senior Notes due 2014 into the U.S. dollar are recorded in our consolidated balance sheet in
‘‘Accumulated other comprehensive income (loss).’’
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