Sears 2011 Annual Report Download - page 52

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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. All debt securities are
considered non-trading. At January 28, 2012, 37% of our debt portfolio was variable rate. Based on the size of
this variable rate debt portfolio at January 28, 2012, which totaled approximately $1.3 billion, an immediate 100
basis point change in interest rates would have affected annual pretax funding costs by $13 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 28, 2012, we had a foreign currency forward contract outstanding, totaling $629 million
Canadian notional value and with a weighted average remaining life of 0.1 years, designed to hedge our net
investment in Sears Canada against adverse changes in exchange rates. The fair value of the forward contract at
January 28, 2012 was $(6) million. A hypothetical 1% adverse movement in the level of the Canadian exchange
rate relative to the U.S. dollar at January 28, 2012, with all other variables held constant, would have resulted in a
fair value of our foreign currency forward contract of approximately $(12) million at January 28, 2012, a
decrease of $6 million. Our foreign currency forward contract requires collateral be posted in the event our
liability under such contract reaches a predetermined threshold. Cash collateral posted under this contract is
recorded as part of our accounts receivable balance. We had $5 million cash collateral posted under this contract
at January 28, 2012.
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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