Honeywell 2004 Annual Report Download - page 55

Financial Instruments
As a result of our global operating and financing activities, we are exposed to market risks from changes in interest and foreign
currency exchange rates and commodity prices, which may adversely affect our operating results and financial position. We minimize
our risks from interest and foreign currency exchange rate and commodity price fluctuations through our normal operating and
financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not use derivative
financial instruments for trading or other speculative purposes and do not use leveraged derivative financial instruments. A summary
of our accounting policies for derivative financial instruments is included in Note 1 of Notes to Financial Statements in “Item 8.
Financial Statements and Supplementary Data”.
We conduct our business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes
in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated
monetary assets and liabilities and anticipated transactions arising from international trade. Our objective is to preserve the economic
value of non-functional currency cash flows. We attempt to have all transaction exposures hedged with natural offsets to the fullest
extent possible and, once these opportunities have been exhausted, through foreign currency forward and option agreements with third
parties. Our principal currency exposures relate to the Euro, the Canadian dollar, British pound, and the U.S. dollar.
Our exposure to market risk from changes in interest rates relates primarily to our debt obligations. As described in Notes 15 and
17 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data”, we issue both fixed and variable rate
debt and use interest rate swaps to manage our exposure to interest rate movements and reduce overall borrowing costs.
Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to
changes in interest or currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit
standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties are substantial
investment and commercial banks with significant experience using such derivative instruments. We monitor the impact of market risk
on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest
and currency exchange rates and restrict the use of derivative financial instruments to hedging activities.
The following table illustrates the potential change in fair value for interest rate sensitive instruments based on a hypothetical
immediate one-percentage-point increase in interest rates across all maturities, the potential change in fair value for foreign exchange
rate sensitive instruments based on a 10 percent weakening of the U.S. dollar versus local currency exchange rates across all
maturities, and the potential change in fair value of contracts hedging commodity purchases based on
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