Kraft 2013 Annual Report Download - page 43

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As we operate primarily in North America but source our commodities from 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 10,
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 28, 2013 and December 29,
2012, 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 28, 2013, 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 12/28/13 Average High Low At 12/28/13 Average High Low
Instruments sensitive to:
Foreign currency rates $ 2$2$2$ 2
Commodity prices 7787
Interest rates $ 32 $ 46 $ 71 $ 32
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
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.