Ingram Micro 2006 Annual Report Download - page 59

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Market Risk
We are exposed to the impact of foreign currency fluctuations and interest rate changes due to our international
sales and global funding. In the normal course of business, we employ established policies and procedures to
manage our exposure to fluctuations in the value of foreign currencies and interest rates using a variety of financial
instruments. It is our policy to utilize financial instruments to reduce risks where internal netting cannot be
effectively employed. It is our policy not to enter into foreign currency or interest rate transactions for speculative
purposes.
Our foreign currency risk management objective is to protect our 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 contracts to offset exchange risk associated with receivables and payables. By policy, we
maintain hedge coverage between minimum and maximum percentages. Currency interest rate swaps are used to
hedge foreign currency denominated principal and interest payments related to intercompany and third-party loans.
During 2006, hedged transactions were denominated in U.S. dollars, Canadian dollars, euros, pounds sterling, Danish
krone, Hungarian forint, Norwegian kroner, Swedish krona, Swiss francs, Australian dollars, Indian rupees, Malaysian
ringit, New Zealand dollars, Singaporean dollars, Thai baht, Brazilian reais, Chilean peso and Mexican peso.
We are exposed to changes in interest rates primarily as a result of our long-term debt used to maintain liquidity
and finance working capital, capital expenditures and business expansion. Our management objective is to finance
our business at interest rates that are competitive in the marketplace. To achieve our objectives we use a combination
of fixed- and variable-rate debt and interest rate swaps. As of December 30, 2006 and December 31, 2005,
substantially all of our outstanding debt had variable interest rates.
Market Risk Management
Foreign exchange and interest rate risk and related derivatives used are monitored using a variety of techniques
including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). The VaR model determines the
maximum potential loss in the fair value of market-sensitive financial instruments assuming a one-day holding
period. The VaR model estimates were made assuming normal market conditions and a 95% confidence level.
There are various modeling techniques that can be used in the VaR computation. Our computations are based on
interrelationships between currencies and interest rates (a “variance/co-variance” technique). The model includes
all of our forwards, cross-currency and other interest rate swaps, fixed-rate debt and nonfunctional currency
denominated cash and debt (i.e., our market-sensitive derivative and other financial instruments as defined by the
SEC). The accounts receivable and accounts payable denominated in foreign currencies, which certain of these
instruments are intended to hedge, were excluded from the model.
The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be
incurred by us, nor does it consider the potential effect of favorable changes in market rates. It also does not
represent the maximum possible loss that may occur. Actual future gains and losses will likely differ from those
estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge
percentages, timing and other factors.
The following table sets forth the estimated maximum potential one-day loss in fair value, calculated using the
VaR model (in millions). We believe that the hypothetical loss in fair value of our derivatives would be offset by
gains in the value of the underlying transactions being hedged.
Interest Rate
Sensitive Financial
Instruments
Currency Sensitive
Financial
Instruments
Combined
Portfolio
VaR as of December 30, 2006 ................ $7.0 $0.2 $5.1
VaR as of December 31, 2005 ................ 6.5 0.2 4.9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning quantitative and qualitative disclosures about market risk is included under the
captions “Market Risk” and “Market Risk Management” in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in this Annual Report on Form 10-K.
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