Proctor and Gamble 2001 Annual Report Download - page 19

major foreign currency exposures involve the markets in Western
and Eastern Europe, Asia, Mexico and Canada. The primary
purpose of the Company’s foreign currency hedging activities is to
manage the volatility associated with foreign currency purchases of
materials and other assets and liabilities created in the normal
course of business. Corporate policy prescribes the range of
allowable hedging activity. The Company primarily utilizes forward
exchange contracts and purchased options with maturities of less
than 18 months.
In addition, the Company enters into certain foreign currency swaps
with maturities of up to five years to hedge intercompany financing
transactions. The Company also utilizes purchased foreign currency
options with maturities of generally less than 18 months and
forward exchange contracts to hedge against the effect of exchange
rate fluctuations on royalties and income from international
operations.
Based on the Company’s overall currency rate exposure as of and
during the year ended June 30, 2001, including derivative and other
instruments sensitive to foreign currency movements, a near-term
change in currency rates, at a 95% confidence level based on
historical currency rate movements, would not materially affect the
Company’s financial statements.
COMMODITY PRICE EXPOSURE
Raw materials used by the Company are subject to price volatility
caused by weather, supply conditions, political and economic
variables and other unpredictable factors. The Company uses
futures, option and swap contracts to manage the volatility related
to certain of these exposures. Commodity hedging activity is not
material to the Company’s financial statements.
Derivative positions are monitored using techniques including
market value, sensitivity analysis and value at risk modeling. The
tests for interest rate and currency rate exposures discussed below
are based on a Monte Carlo simulation value at risk model using a
one year horizon and a 95% confidence level. The model
incorporates the impact of correlation and diversification from
holding multiple currency and interest rate instruments and
assumes that financial returns are normally distributed. Estimates
of volatility and correlations of market factors are drawn from the
RiskMetrics™ dataset as of June 30, 2001. In cases where data is
unavailable in RiskMetrics™ a reasonable proxy is included.
The Company’s market risk exposures relative to interest and
currency rates, as discussed below, have not changed materially
versus the previous reporting period. In addition, the Company is
not aware of any facts or circumstances that would significantly
impact such exposures in the near term.
INTEREST RATE EXPOSURE
Interest rate swaps are used to hedge underlying debt obligations.
Certain currency interest rate swaps are designated as hedges of
the Company’s foreign net investments.
Based on the Company’s overall interest rate exposure as of and
during the year ended June 30, 2001, including derivative and other
instruments sensitive to interest rates, a near-term change in
interest rates, at a 95% confidence level based on historical interest
rate movements, would not materially affect the Company’s
financial statements.
CURRENCY RATE EXPOSURE
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to
movements in foreign currency exchange rates. The Company’s
The Procter & Gamble Company and Subsidiaries 17
Financial Review (continued)