Sears 2010 Annual Report Download - page 47

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Certain of these and other factors are discussed in more detail in Item 1A of this Annual Report on Form
10-K. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may
differ materially. We intend the forward-looking statements to speak only at the time made and do not undertake
to update or revise them as more information becomes available.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We face market risk exposure in the form of interest rate risk and foreign currency 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.
All debt securities and interest-rate derivative instruments are considered non-trading. At January 29, 2011, 21%
of our debt portfolio was variable rate. Based on the size of this variable rate debt portfolio at January 29, 2011,
which totaled approximately $740 million, an immediate 100 basis point change in interest rates would have
affected annual pretax funding costs by $7 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
At January 29, 2011, we had a series of foreign currency forward contracts outstanding, totaling
$629 million Canadian notional value and with a weighted average remaining life of 0.5 years, designed to hedge
our net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the
forward contracts at January 29, 2011 was $1 million. A hypothetical 1% adverse movement in the level of the
Canadian exchange rate relative to the U.S. dollar at January 29, 2011, with all other variables held constant,
would have resulted in a loss in the fair value of our foreign currency forward contracts of approximately
$6 million at January 29, 2011. 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. We had $3 million of cash collateral posted under these
contracts at January 29, 2011.
Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in
U.S. currency by purchasing U.S. dollar denominated collar contracts for a portion of its expected requirements.
At January 29, 2011, these contracts had a notional value of approximately $372 million and a weighted average
remaining life of 0.5 years. The aggregate fair value of the collar contracts at January 29, 2011 was negative
$3 million. A hypothetical 1% adverse movement in the level of the Canadian exchange rate relative to the U.S.
dollar at January 29, 2011, with all other variables held constant, would have resulted in a fair value for these
contracts of approximately negative $7 million at January 29, 2011, a decrease of $4 million.
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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