Lexmark 2007 Annual Report Download - page 57

Download and view the complete annual report

Please find page 57 of the 2007 Lexmark annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 113

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVITY
The market risk inherent in the Company’s financial instruments and positions represents the potential loss
arising from adverse changes in interest rates and foreign currency exchange rates.
Interest Rates
At December 31, 2007, the fair value of the Company’s senior notes was estimated at $150 million using
quoted market prices and yields obtained through independent pricing sources for the same or similar
types of borrowing arrangements, taking into consideration the underlying terms of the debt. The fair value
of the senior notes exceeded the carrying value as recorded in the Consolidated Statements of Financial
Position at December 31, 2007, by approximately $0.4 million. Market risk is estimated as the potential
change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to
approximately $0.3 million at December 31, 2007.
The Company has interest rate swaps that serve as a fair value hedge of the Company’s senior notes. The
fair value of the interest rate swaps at December 31, 2007, was an asset of $0.1 million. Market risk for the
interest rate swaps is estimated as the potential change in fair value resulting from a hypothetical 10%
adverse change in interest rates and amounts to approximately $0.3 million at December 31, 2007.
Foreign Currency Exchange Rates
The Company has employed, from time to time, a foreign currency hedging strategy to limit potential losses
in earnings or cash flows from adverse foreign currency exchange rate movements. Foreign currency
exposures arise from transactions denominated in a currency other than the Company’s functional
currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary
currencies to which the Company is exposed include the Euro, the Mexican peso, the British pound, the
Philippine peso, the Australian dollar and other Asian and South American currencies. Exposures may be
hedged with foreign currency forward contracts, put options, and call options generally with maturity dates
of twelve months or less. The potential loss in fair value at December 31, 2007, for such contracts resulting
from a hypothetical 10% adverse change in all foreign currency exchange rates is approximately
$24 million. This loss would be mitigated by corresponding gains on the underlying exposures.
51