Lexmark 2015 Annual Report Download - page 61

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57
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, 2015 the fair value of the Company’s senior notes was estimated at $735.6 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, 2015 by $38.3 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 $9.0 million at December 31, 2015.
Compared to the previous fiscal year, there has been no material change to the nature of the Company’s exposure to market risk
relating to adverse changes in interest rates.
Since the borrowings under the revolving credit facility and the accounts receivable program utilize variable interest rate setting
mechanisms such as one-month LIBOR, the fair value of these borrowings is deemed to be at par and the sensitivity of these
borrowings to changes in interest rates is deemed to be immaterial.
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 Swiss franc, the Philippine peso, the Chinese
renminbi, the Singapore dollar, the Chilean peso and the Swedish krona. 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, 2015 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 $34.3 million. This loss would be mitigated by corresponding gains on the
underlying exposures. Compared to the previous fiscal year, there has been no material change to the nature of the Company’s
exposure to market risk relating to adverse changes in foreign currency exchange rates.