Kraft 2012 Annual Report Download - page 45

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As we operate primarily in North America but source our commodities on global markets and periodically enter into
financing or other arrangements abroad, we use financial instruments to manage our primary market risk exposures, which
are commodity price, foreign currency exchange rate, 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 commodity price, foreign currency, and interest rate risk management policies that principally use
derivative instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in commodity
prices, foreign currency exchange rates, 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 11, Financial Instruments, to the consolidated financial statements for further
details of our commodity price, foreign currency, and interest rate risk management policies and the types of derivative
instruments we use to hedge those exposures.
Value at Risk:
We use a value at risk (“VAR”) computation to estimate: 1) the potential one-day loss in pre-tax earnings of our commodity
price and foreign currency-sensitive derivative financial instruments; and 2) the potential one-day loss in the fair value of
our interest rate-sensitive financial instruments. We included our debt, commodity futures, forwards and options, foreign
currency forwards and interest rate swaps in our VAR computation. Excluded from the computation were anticipated
transactions and foreign currency trade payables and receivables which the financial instruments are intended to hedge.
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 29, 2012 and December 31, 2011, and over each of
the four prior quarters for the calculation of average VAR amounts during each year. The values of 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.
As of December 29, 2012, the estimated potential one-day loss in pre-tax earnings from our commodity and foreign
currency instruments and the estimated potential one-day loss in fair value of our interest rate-sensitive instruments, as
calculated in the VAR model, were (in millions):
Pre-Tax Earnings Impact Fair Value Impact
At 12/29/12 Average High Low At 12/29/12 Average High Low
Instruments sensitive to:
Foreign currency rates $ 2 $ 2 $ 3 $ 1
Commodity prices 6 13 18 6
Interest rates $59$42$59$14
Pre-Tax Earnings Impact Fair Value Impact
At 12/31/11 Average High Low At 12/31/11 Average High Low
Instruments sensitive to:
Foreign currency rates $ 1 $ 2 $ 2 $ 1
Commodity prices 14 17 20 13
Interest rates $9$2$9$ -
This VAR computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from
adverse movements in commodity prices, foreign currency rates, and interest rates under normal market conditions. The
computation does not represent actual losses in fair value or earnings to be incurred by us, nor does it consider the effect
of favorable changes in market rates. We cannot predict actual future movements in such market rates and do not present
these VAR results to be indicative of future movements in such market rates or to be representative of any actual impact
that future changes in market rates may have on our future financial results.
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