Motorola 2009 Annual Report Download - page 82

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74
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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
transactions 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 part of a hedging relationship at the inception of the contract. Accordingly, changes in the
market values of hedge instruments must be highly correlated with changes in market values of the underlying
hedged items both at the inception of the hedge and over the life of the hedge contract.
The Company’s strategy related to foreign exchange exposure management 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 typically 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 the authoritative
accounting guidance 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,
by managing net asset positions, product pricing and component sourcing.
At December 31, 2009, the Company had outstanding foreign exchange contracts totaling $1.7 billion,
compared to $2.2 billion outstanding at December 31, 2008. 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 generally 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 the five largest net notional amounts of the positions to buy or sell foreign
currency as of December 31, 2009 and the corresponding positions as of December 31, 2008:
Notional Amount
December 31, December 31,
Net Buy (Sell) by Currency 2009 2008
Euro $(377) $(445)
Brazilian Real (342) (356)
Chinese Renminbi (297) (481)
Japanese Yen (236) 111
British Pound 143 122
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 denominated in a
currency other than the functional currency of the legal entity holding the instrument. Derivative financial
instruments consist primarily of forward contracts and currency options. Other financial instruments denominated
in a currency other than the functional currency of the legal entity holding the instrument consist primarily of
cash, cash equivalents, Sigma Fund investments 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 $158 million as of December 31,
2009 if the foreign currency rates were to change unfavorably by 10% from 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 occur. The Company expects that gains and losses on the derivative financial
instruments should offset gains and losses on the assets, liabilities and future transactions being hedged. If the
hedged transactions were included in the sensitivity analysis, the hypothetical change in fair value would be
immaterial. The foreign exchange financial instruments are held for purposes other than trading.