National Oilwell Varco 2010 Annual Report Download - page 69

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As of December 31, 2010, the Company did not have any interest rate swaps and its financial instruments do not contain any credit-risk-related or
other contingent features that could cause accelerated payments when the Companys financial instruments are in net liability positions. We do
not use derivative financial instruments for trading or speculative purposes.
Cash Flow Hedging Strategy
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash
flows that is subject to a particular currency risk),the effective portion of the gain or loss on the derivative instrument is reported as a component
of Other Comprehensive Income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same
period or periods during which the hedged transaction affects earnings (e.g., in revenues when the hedged transactions are cash flows
associated with forecasted revenues).The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present
value of future cash flows of the hedged item, if any (i.e. the ineffective portion), or hedge components excluded from the assessment of
effectiveness, are recognized in the Consolidated Statements of Income during the current period.
To protect against the volatility of forecasted foreign currency cash flows resulting from forecasted sales and expenses, the Company has
instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in nonfunctional
currencies with forward contracts. When the U.S. dollar strengthens against the foreign currencies, the decrease in present value of future foreign
currency revenue and costs is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the U.S. dollar
weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
As of December 31, 2010, the Company had the following outstanding foreign currency forward contracts that were entered into to hedge
nonfunctional currency cash flows from forecasted revenues and costs (in millions):
Currency Denomination
December 31,
Foreign Currency 2010 2009
British Pound Sterling £ 4 £ 39
Danish Krone DKK 31 DKK 180
Euro 122  199
Norwegian Krone NOK 4,983 NOK 6,097
U.S. Dollar $ 247 $ 224
Korean Won KRW KRW 2,317
Fair Value Hedging Strategy
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is subject to a particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in
current earnings (e.g., in revenue when the hedged item is a contracted sale).
The Company enters into forward exchange contracts to hedge certain firm commitments of revenue and costs that are denominated in currencies
other than the functional currency of the operating unit. The purpose of the Companys foreign currency hedging activities is to protect the
Company from risk that the eventual U.S. dollar-equivalent cash flows from the sale of products to customers will be adversely affected by
changes in the exchange rates.
As of December 31, 2010, the Company had the following outstanding foreign currency forward contracts that were entered into to hedge
nonfunctional currency fair values of firm commitments of revenues and costs (in millions):
Currency Denomination
December 31,
Foreign Currency 2010 2009
U.S. Dollar $1 $52
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