Motorola 2007 Annual Report Download - page 100

Download and view the complete annual report

Please find page 100 of the 2007 Motorola 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 146

  • 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
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146

5. Risk Management
Derivative Financial Instruments
Foreign Currency Risk
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, 2007 and 2006, the Company had net outstanding foreign exchange contracts totaling
$3.0 billion and $4.8 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, 2007 and the corresponding positions as of December 31, 2006:
Buy (Sell) 2007 2006
December 31,
Chinese Renminbi $(1,292) $(1,195)
Brazilian Real (377) (466)
Taiwan Dollar 112 87
Japanese Yen 384 143
British Pound 396 252
The Company is exposed to credit loss in the event of nonperformance by the counterparties to its financial
instruments. The Company minimizes its credit risk on these transactions by only dealing with leading,
creditworthy financial institutions and does not anticipate nonperformance. In addition, the contracts are
distributed among several financial institutions, all of whom presently have investment grade credit ratings, thus
minimizing credit risk concentration.
The Company recorded income of $0.6 million and $1.5 million for the years ended December 31, 2006 and
2005, respectively, representing the ineffective portions of changes in the fair value of fair value hedge positions.
The ineffective portion of changes in the fair value of foreign currency fair value hedge positions in 2007 was de
minimis. These amounts are included in Other within Other income (expense) in the Company’s consolidated
statements of operations. The above amounts include the change in the fair value of derivative contracts related to
the changes in the difference between the spot price and the forward price. These amounts are excluded from the
measure of effectiveness. Expense (income) related to fair value hedges that were discontinued for the years ended
December 31, 2007, 2006 and 2005 are included in the amounts noted above.
The Company recorded income of $1 million, $13 million and $1 million for the years ended December 31,
2007, 2006 and 2005, respectively, representing the ineffective portions of changes in the fair value of cash flow
92