Kraft 2009 Annual Report Download - page 56

These forward-looking statements involve risks and uncertainties, and the cautionary statements contained in the “Risk Factors” found in this
Annual Report on Form 10-K identify important factors that could cause actual results to differ materially from those predicted in any such
forward-looking statements. Such factors, include, but are not limited to, continued volatility in commodity costs, pricing actions, increased
competition, our ability to differentiate our products from private label products, increased costs of sales, our indebtedness and our ability to pay
our indebtedness, unexpected safety or manufacturing issues, Food and Drug Administration or other regulatory actions or delays, unanticipated
expenses such as litigation or legal settlement expenses, a shift in our product mix to lower margin offerings, risks from operating globally, our
failure to successfully integrate the Cadbury business and tax law changes. We disclaim and do not undertake any obligation to update or revise
any forward-looking statement in this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As we operate globally, we use certain financial instruments to manage our foreign currency exchange rate, commodity price and interest rate
risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the
unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our
operating results. We maintain foreign currency, commodity price and interest rate risk management policies that principally use derivative
instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in foreign currency exchange rates, commodity
prices and interest rates. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to
cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative
purposes. Refer to Note 1, Summary of Significant Accounting Policies, and Note 12, Financial Instruments, to the consolidated financial
statements for further details of our foreign currency, commodity price and interest rate risk management policies and the types of derivative
instruments we use to hedge those exposures.
In October 2008, one of our counterparties, Lehman Brothers Commercial Corporation, filed for bankruptcy. Consequently, we wrote off an
insignificant asset related to derivatives held with them. This did not have a significant impact on our foreign currency risk management program.
Value at Risk:
We use a value at risk (“VAR”) computation to estimate: 1) the potential one-day loss in the fair value of our interest rate-sensitive financial
instruments; and 2) the potential one-day loss in pre-tax earnings of our foreign currency and commodity price-sensitive derivative financial
instruments. We included our debt; short-term investments; foreign currency forwards, swaps and options; and commodity futures, forwards and
options in our VAR computation. Anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign
subsidiaries, which the abovementioned instruments are intended to hedge, were excluded from the computation.
We made the VAR estimates assuming normal market conditions, using a 95% confidence interval. We used a “variance / co-variance” model to
determine the observed interrelationships between movements in interest rates and various currencies. These interrelationships were determined
by observing interest rate and forward currency rate movements over the prior quarter for the calculation of VAR amounts at December 31, 2009
and 2008, and over each of the four prior quarters for the calculation of average VAR amounts during each year. The values of foreign currency
and commodity options do not change on a one-to-one basis with the underlying currency or commodity, and were valued accordingly in the VAR
computation.
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Source: KRAFT FOODS INC, 10-K, February 25, 2010 Powered by Morningstar® Document Research℠