Ingram Micro 2000 Annual Report Download - page 35

.2 8 |INGRAM MICRO
M a r k e t r i s k
The Company is exposed to the impact of foreign currency fluctuations and interest rate changes due to its international sales
and global funding. In the normal course of business, the Company employs established policies and procedures to manage its expo-
sure to fluctuations in the value of foreign currencies and interest rates using a variety of financial instruments. It is the Company’s
policy to utilize financial instruments to reduce risks where internal netting cannot be effectively employed. It is the Company’s
policy not to enter into foreign currency or interest rate transactions for speculative purposes.
In addition to product sales and costs,the Company has foreign currency risk related to debt that is denominated in currencies
other than the dollar and cross-currency swaps hedging intercompany debt.The Company’s foreign cur rency risk management
objective is to protect its earnings and cash flows resulting from sales,purchases and other transactions from the adverse impact
of exchange rate movements. Foreign exchange risk is managed by using forward and option contracts to hedge receivables and
payables. By policy, the Company maintains hedge coverage between minimum and maximum percentages. Cross-currency swaps
are used to hedge foreign currency denominated payments related to intercompany and third-party loans. During 2000,hedged
transactions were denominated primarily in euros, Canadian dollars, Australian dollars,Danish kroner, Swedish krona,Swiss francs,
Norwegian kroner, Indian rupees and Mexican pesos.
The Company is exposed to changes in interest rates primarily as a result of its long-term debt used to maintain liquidity and
finance inventory, capital expenditures and business expansion. Interest rate risk is also present in the cross-currency swaps hedging
intercompany and third-party loans.The Company’s interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs.To achieve its objectives the Company uses a combina-
tion of fixed- and variable-rate debt.As of December 30, 2000 and January 1, 2000, approximately 40% and 34%, respectively, of
the Company’s outstanding debt had fixed interest rates.
M a r k e t r i s k m a n a g e m e n t
Fo reign exchange and interest rate risk and re l ated deri vat i ves use is monitored using a va riety of techniques including a rev i ew
of market va l u e, sensitivity analysis and Va l u e - at-Risk (“Va R ” ) .The VaR model determines the maximum potential loss in the fa i r
value of foreign exchange rat e - s e n s i t i ve financial instruments assuming a one-day holding peri o d .The VaR model estimates we re
made assuming normal market conditions and a 95% confidence leve l .T h e re are va rious modeling techniques that can be used
in the VaR computat i o n .The Company ’s computations are based on interre l ationships between currencies and interest rates
(a “ va ri a n c e / c o - va ri a n c e ”t e ch n i q u e ) .These interre l ationships we re determined by observing foreign curre n cy market changes and
i n t e r est rate changes over the preceding 90 day s.The value of foreign curre n cy options does not change on a one-to-one basis with
changes in the underlying curre n cy rat e.The potential loss in option value was adjusted for the estimated sensitivity (the “ d e l t a ”a n d
“gamma”) to changes in the underlying curre n cy rat e.The model includes all of the Company ’s forwa r d s , o p t i o n s ,c ro s s - c u r re n cy
swaps and nonfunctional curre n cy denominated debt (i.e. , the Company ’s marke t - s e n s i t i ve deri vat i v e and other financial instru m e n t s
as defined by the SEC).The accounts re c e i va ble and accounts paya ble denominated in foreign curre n c i e s , w h i ch certain of these
i n s t ruments are intended to hedge, we re excluded from the model.
The VaR model is a risk analysis tool and does not purp o rt to re p resent actual losses in fair value that will be incurred by the
C o m p a n y, nor does it consider the potential effect of favo r a ble changes in market rat e s. It also does not re p resent the maximum
p o s s i b le loss that may occur. Actual future gains and losses will like ly differ from those estimated because of changes or differences
in market rates and interre l at i o n s h i p s , h e d ging instruments and hedge percentages, timing and other fa c t o rs.
Ma n a g e m e n t’s discu s sion and analysis ]c o n t i nu e d