Motorola 2006 Annual Report Download - page 77

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
As a multinational company, the Company's transactions are denominated in a variety of currencies. The
Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash
flows. The Company's policy prohibits speculation in financial instruments for profit on the exchange rate price
fluctuation, trading in currencies for which there are no underlying exposures, or entering into trades for any
currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging
relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as
a part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of underlying hedged items both at the
inception of the hedge and over the life of the hedge contract.
The Company's strategy in foreign exchange exposure issues is to offset the gains or losses on the financial
instruments against losses or gains on the underlying operational cash flows or investments based on the operating
business units' assessment of risk. The Company enters into derivative contracts for some of the Company's non-
functional currency receivables and payables, which are primarily denominated in major currencies that can be
traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In
addition, the Company enters into derivative contracts for some firm commitments and some forecasted
transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies
for hedge accounting under the provisions of SFAS No. 133, ""Accounting for Derivative Instruments and Hedging
Activities.'' A portion of the Company's exposure is from currencies that are not traded in liquid markets and these
are addressed, to the extent reasonably possible, through managing net asset positions, product pricing and
component sourcing.
At December 31, 2006 and 2005, the Company had net outstanding foreign exchange contracts totaling
$4.8 billion and $2.8 billion, respectively. Management believes that these financial instruments should not subject
the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should
offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the
instruments, which are charged to Other within Other income (expense) in the Company's consolidated statements
of operations. The following table shows, in millions of U.S. dollars, the five largest net foreign exchange contract
positions as of December 31, 2006 and, 2005:
December 31,
Buy (Sell) 2006 2005
Euro $(2,069) $(1,076)
Chinese Renminbi (1,195) (728)
Brazilian Real (466) (348)
Indian Rupee (148) (70)
British Pound 252 (226)
The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their
obligations. However, the Company does not expect any counterparties, all of whom presently have investment
grade credit ratings, to fail to meet their obligations.
Foreign exchange financial instruments that are subject to the effects of currency fluctuations, which may
affect reported earnings, include derivative financial instruments and other financial instruments which are not
denominated in the functional currency of the legal entity holding the instrument. Derivative financial instruments
consist primarily of forward contracts and currency options. Other financial instruments, which are not
denominated in the functional currency of the legal entity holding the instrument, consist primarily of cash, cash
equivalents, Sigma Funds and short-term investments, as well as accounts payable and receivable. Accounts payable
and receivable are reflected at fair value in the financial statements. The fair value of the foreign exchange financial
instruments would hypothetically decrease by $312 million as of December 31, 2006 if the foreign currency rates
were to change unfavorably by 10% of current levels. This hypothetical amount is suggestive of the effect on future
cash flows under the following conditions: (i) all current payables and receivables that are hedged were not
realized, (ii) all hedged commitments and anticipated transactions were not realized or canceled, and (iii) hedges
of these amounts were not canceled or offset. The Company does not expect that any of these conditions will be