John Deere 2010 Annual Report Download - page 22

22
FINANCIAL INSTRUMENT RISK INFORMATION
The company is naturally exposed to various interest rate and
foreign currency risks. As a result, the company enters into
derivative transactions to manage certain of these exposures that
arise in the normal course of business and not for the purpose of
creating speculative positions or trading. The company’s credit
operations manage the relationship of the types and amounts of
their funding sources to their receivable and lease portfolio in
an effort to diminish risk due to interest rate and foreign
currency fl uctuations, while responding to favorable fi nancing
opportunities. Accordingly, from time to time, these operations
enter into interest rate swap agreements to manage their interest
rate exposure. The company also has foreign currency exposures
at some of its foreign and domestic operations related to buying,
selling and fi nancing in currencies other than the local currencies.
The company has entered into agreements related to the
management of these foreign currency transaction risks.
The credit risk under these interest rate and foreign currency
agreements is not considered to be signifi cant.
Interest Rate Risk
Quarterly, the company uses a combination of cash fl ow models
to assess the sensitivity of its fi nancial instruments with interest
rate exposure to changes in market interest rates. The models
calculate the effect of adjusting interest rates as follows.
Cash fl ows for fi nancing receivables are discounted at the
current prevailing rate for each receivable portfolio. Cash fl ows
for marketable securities are primarily discounted at the
applicable benchmark yield curve plus market credit spreads.
Cash fl ows for unsecured borrowings are discounted at the
applicable benchmark yield curve plus market credit spreads for
similarly rated borrowers. Cash fl ows for securitized borrowings
are discounted at the swap yield curve plus a market credit
spread for similarly rated borrowers. Cash fl ows for interest rate
swaps are projected and discounted using forward rates from the
swap yield curve at the repricing dates. The net loss in these
fi nancial instruments’ fair values which would be caused by
decreasing the interest rates by 10 percent from the market rates
at October 31, 2010 would have been approximately $3 million.
The net loss from decreasing the interest rates by 10 percent at
October 31, 2009 would have been approximately $71 million.
Foreign Currency Risk
In the Equipment Operations, the company’s practice is to
hedge signifi cant currency exposures. Worldwide foreign
currency exposures are reviewed quarterly. Based on the
Equipment Operations’ anticipated and committed foreign
currency cash infl ows, outfl ows and hedging policy for the
next twelve months, the company estimates that a hypothetical
10 percent weakening of the U.S. dollar relative to other
currencies through 2011 would decrease the 2011 expected
net cash infl ows by $15 million. At last year end, a hypothetical
10 percent weakening of the U.S. dollar under similar assump-
tions and calculations indicated a potential $20 million adverse
effect on the 2010 net cash infl ows.
In the Financial Services operations, the company’s
policy is to hedge the foreign currency risk if the currency of
the borrowings does not match the currency of the receivable
portfolio. As a result, a hypothetical 10 percent adverse change
in the value of the U.S. dollar relative to all other foreign
currencies would not have a material effect on the Financial
Services cash fl ows.