Lexmark 2014 Annual Report Download - page 62

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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, 2014, the fair value of the Company’s senior notes was estimated at $756.6 million based on the prices the bonds
have recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of
coupon payments each year and the maturity dates. The fair value of the senior notes exceeded the carrying value as recorded in the
Consolidated Statements of Financial Position at December 31, 2014 by approximately $56.9 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 $10.7
million at December 31, 2014.
At December 31, 2013, the fair value of the Company’s senior notes was estimated at $745.1 million based on the prices the bonds
had recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of
coupon payments each year and the maturity dates. The fair value of the senior notes exceeded the carrying value as recorded in the
Consolidated Statements of Financial Position at December 31, 2013 by approximately $45.5 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
$14.7 million at December 31, 2013.
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions denominated in a currency other than the functional currency of the Company or
the respective foreign currency of each of the Company’s subsidiaries as well as foreign currency denominated revenue and profit
translated into the functional currency of the Company. The primary currencies to which the Company was exposed on a transaction
basis as of the end of the fourth quarter include the Euro, the British pound, the Canadian dollar, the Chinese renminbi, the Philippine
peso, the Swedish krona, the Singapore dollar and the Swiss franc. The Company primarily hedges its transaction foreign exchange
exposures with foreign currency forward contracts (“transaction hedge contracts”) with maturity dates of approximately three months
or less, though all foreign currency exposures may not be fully hedged. In 2014, the Company began hedging anticipated foreign
currency denominated sales with foreign exchange option contracts (“cash flow hedge contracts”). The potential loss in fair value at
December 31, 2014 for transaction and cash flow hedge contracts resulting from a hypothetical 10% adverse change in all foreign
currency exchange rates versus the U.S. dollar is approximately $89.9 million. This loss would be mitigated by corresponding gains
on the underlying exposures. The potential loss in fair value at December 31, 2013 for transaction hedge contracts resulting from a
hypothetical 10% adverse change in all foreign currency exchange rates versus the U.S. dollar was approximately $3.0 million. This
loss would have been mitigated by corresponding gains on the underlying exposures.
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