Honeywell 2012 Annual Report Download - page 59

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Our exposure to market risk from changes in interest rates relates primarily to our net debt and
pension obligations. As described in Note 14 Long-term Debt and Credit Agreements and Note 16
Financial Instruments and Fair Value Measures of Notes to the Financial Statements, 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 nonperfor-
mance and to market risk related to changes in interest and foreign currency exchange rates and
commodity prices. 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 expected
future 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
a 20 percent decrease in the price of the underlying commodity across all maturities at December 31,
2012 and 2011.
Face or
Notional
Amount
Carrying
Value(1)
Fair
Value(1)
Estimated
Increase
(Decrease)
in Fair
Value
December 31, 2012
Interest Rate Sensitive Instruments
Long-term debt (including current maturities) . . . . . . . . . . . . $7,020 $(7,020) $(8,152) $(555)
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 146 146 (67)
Foreign Exchange Rate Sensitive Instruments
Foreign currency exchange contracts(2). . . . . . . . . . . . . . . . . 8,506 20 20 361
Commodity Price Sensitive Instruments
Forward commodity contracts(3) . . . . . . . . . . . . . . . . . . . . . . . . 17 — — (3)
December 31, 2011
Interest Rate Sensitive Instruments
Long-term debt (including current maturities) . . . . . . . . . . . . $6,896 $(6,896) $(7,896) $(578)
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 134 134 (74)
Foreign Exchange Rate Sensitive Instruments
Foreign currency exchange contracts(2). . . . . . . . . . . . . . . . . 7,108 (26) (26) 274
Commodity Price Sensitive Instruments
Forward commodity contracts(3) . . . . . . . . . . . . . . . . . . . . . . . . 59 (9) (9) (10)
(1) Asset or (liability).
(2) Changes in the fair value of foreign currency exchange contracts are offset by changes in the fair
value or cash flows of underlying hedged foreign currency transactions.
(3) Changes in the fair value of forward commodity contracts are offset by changes in the cash flows
of underlying hedged commodity transactions.
The above discussion of our procedures to monitor market risk and the estimated changes in fair
value resulting from our sensitivity analyses are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ materially from these
estimated results due to actual developments in the global financial markets. The methods used by us
to assess and mitigate risk discussed above should not be considered projections of future events.
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