Starwood 2010 Annual Report Download - page 156

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Note 24. Derivative Financial Instruments
The Company, based on market conditions, enters into forward contracts to manage foreign exchange risk. The
Company enters into forward contracts to hedge forecasted transactions based in certain foreign currencies,
including the Euro, Canadian Dollar and Yen. These forward contracts have been designated and qualify as cash
flow hedges, and their change in fair value is recorded as a component of other comprehensive income and
reclassified into earnings in the same period or periods in which the forecasted transaction occurs. To qualify as a
hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that
receive hedge accounting. The notional dollar amounts of the outstanding Euro and Yen forward contracts at
December 31, 2010 are $31 million and $6 million, respectively, with average exchange rates of 1.3 and 83.7,
respectively, with terms of primarily less than one year. The Company reviews the effectiveness of its hedging
instruments on a quarterly basis and records any ineffectiveness into earnings. The Company discontinues hedge
accounting for any hedge that is no longer evaluated to be highly effective. From time to time, the Company may
choose to de-designate portions of hedges when changes in estimates of forecasted transactions occur. Each of these
hedges was highly effective in offsetting fluctuations in foreign currencies.
The Company also enters into forward contracts to manage foreign exchange risk on intercompany loans that
are not deemed permanently invested. These forward contracts are not designated as hedges, and their change in fair
value is recorded in the Company’s consolidated statements of income during each reporting period.
The Company enters into interest rate swap agreements to manage interest expense. The Company’s objective
is to manage the impact of interest rates on the results of operations, cash flows and the market value of the
Company’s debt. At December 31, 2010, the Company has six interest rate swap agreements with an aggregate
notional amount of $500 million under which the Company pays floating rates and receives fixed rates of interest
(“Fair Value Swaps”). The Fair Value Swaps hedge the change in fair value of certain fixed rate debt related to
fluctuations in interest rates and mature in 2012, 2013 and 2014. The Fair Value Swaps modify the Company’s
interest rate exposure by effectively converting debt with a fixed rate to a floating rate. These interest rate swaps
have been designated and qualify as fair value hedges.
The counterparties to the Company’s derivative financial instruments are major financial institutions. The
Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptable level.
The following tables summarize the fair value of our derivative instruments, the effect of derivative
instruments on our Consolidated Statements of Comprehensive Income, the amounts reclassified from “Other
comprehensive income” and the effect on the Consolidated Statements of Income during the year.
Fair Value of Derivative Instruments
(In millions)
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
December 31, 2010 December 31, 2009
Derivatives designated as
hedging instruments
Asset Derivatives
Forward contracts . . . . . . . . . Prepaid and other current assets $— Prepaid and other current assets $—
Interest rate swaps. . . . . . . . . Other assets 16 Other assets 7
Total assets . . . . . . . . . . . . $16 $ 7
F-40
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)