Xerox 2006 Annual Report Download - page 51

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Financial Risk Management
We are exposed to market risk from foreign
currency exchange rates and interest rates, which could
affect operating results, financial position and cash
flows. We manage our exposure to these market risks
through our regular operating and financing activities
and, when appropriate, through the use of derivative
financial instruments. These derivative financial
instruments are utilized to hedge economic exposures
as well as reduce earnings and cash flow volatility
resulting from shifts in market rates. Refer to Note
13 – Financial Instruments to the Consolidated
Financial Statements for further discussion on our
financial risk management.
Assuming a 10% appreciation or depreciation in
foreign currency exchange rates from the quoted
foreign currency exchange rates at December 31, 2006,
the potential change in the fair value of foreign
currency-denominated assets and liabilities in each
entity would not be significant because all material
currency asset and liability exposures were
economically hedged as of December 31, 2006. A 10%
appreciation or depreciation of the U.S. dollar against
all currencies from the quoted foreign currency
exchange rates at December 31, 2006 would have a
$596 million impact on our Cumulative translation
adjustment portion of equity. The amount permanently
invested in foreign subsidiaries and affiliates, primarily
Xerox Limited, Fuji Xerox, Xerox Canada Inc. and
Xerox do Brasil, and translated into dollars using the
year-end exchange rates, was $6.0 billion at
December 31, 2006.
Interest Rate Risk Management: The consolidated
weighted-average interest rates related to our debt and
liabilities to subsidiary trusts issuing preferred
securities for 2006, 2005 and 2004 approximated
6.8%, 6.0%, and 5.8%, respectively. Interest expense
includes the impact of our interest rate derivatives.
Virtually all customer-financing assets earn fixed
rates of interest. As discussed above, a significant
portion of those assets has been pledged as collateral
for secured financing arrangements and the interest
rates on a significant portion of those loans are fixed.
As of December 31, 2006, approximately $2.2
billion of our debt and liabilities to subsidiary trusts
issuing preferred securities carried variable interest
rates, including the effect of pay-variable interest rate
swaps we are utilizing with the intent to reduce the
effective interest rate on our debt.
The fair market values of our fixed-rate financial
instruments are sensitive to changes in interest rates.
At December 31, 2006, a 10% change in market
interest rates would change the fair values of such
financial instruments by approximately $233 million.
Forward-Looking Statements
This Annual Report contains forward-looking
statements as defined in the Private Securities
Litigation Reform Act of 1995. The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,”
“will,” “should” and similar expressions, as they relate
to us, are intended to identify forward-looking
statements. These statements reflect management’s
current beliefs, assumptions and expectations and are
subject to a number of factors that may cause actual
results to differ materially. Information concerning
these factors is included in our 2006 Annual Report on
Form 10-K filed with the Securities and Exchange
Commission (“SEC”). We do not intend to update
these forward-looking statements, except as required
by law.
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