Sears 2007 Annual Report Download - page 52

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We face market risk exposure in the form of interest rate risk, foreign currency risk and equity price risk.
These market risks arise from our derivative financial instruments and debt obligations.
Interest Rate Risk
We manage interest rate risk through the use of fixed and variable-rate funding and interest rate derivatives.
As of February 2, 2008, we had interest rate derivatives with a notional amount of $120 million, nominal fair
value and a weighted average remaining life of 0.9 years. All debt securities and interest-rate derivative
instruments are considered non-trading. As of February 2, 2008, 16% of our debt portfolio was variable rate.
Based on the size of this variable rate debt portfolio at February 2, 2008, which totaled approximately $480
million, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by
$4.8 million. These estimates do not take into account the effect on income resulting from invested cash or the
returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains
constant for an annual period and that the interest rate change occurs at the beginning of the period.
Foreign Currency Risk
As of February 2, 2008, we had a series of foreign currency forward contracts outstanding, totaling
$1.0 billion Canadian notional value and with a weighted average remaining life of 0.3 years, designed to hedge
our net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the
forward contracts as of February 2, 2008 was negative $86 million. A hypothetical 10% adverse movement in the
level of the Canadian exchange rate relative to the U.S. dollar as of February 2, 2008, with all other variables
held constant, would have resulted in a loss in the fair value of our foreign currency forward contracts of
approximately $110 million as of February 2, 2008. Certain of our currency forward contracts require collateral
be posted in the event our liability under such contracts reaches a predetermined threshold. Cash collateral posted
under these contracts is recorded as part of our accounts receivable balance and totaled $33 million as of
February 2, 2008.
Counterparties
We actively manage the risk of nonpayment by our derivative counterparties by limiting our exposure to
individual counterparties based on credit ratings, value at risk and maturities. The counterparties to these
instruments are major financial institutions with credit ratings of single-A or better. In certain cases, counterparty
risk is also managed through the use of collateral in the form of cash or U.S. government securities.
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