Xerox 2007 Annual Report Download - page 111

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
term of the related notes. In 2007, 2006 and 2005, the
amortization of these fair value adjustments reduced
interest expense by $9, $9 and $11, respectively, and we
expect to record a net increase to interest expense of $19
in future years through 2027.
Foreign Exchange Risk Management: We may use
certain derivative instruments to manage the exposures
associated with the foreign currency exchange risks
discussed below.
Issuance of foreign currency denominated debt
• We enter into cross-currency interest rate swap
agreements to swap the proceeds and related interest
payments with a counterparty. In return, we receive
and effectively denominate the debt in local
functional currencies.
• We utilize forward exchange contracts to hedge the
currency exposure for interest payments on foreign
currency denominated debt.
• These derivatives may be designated as fair value
hedges or cash flow hedges depending on the nature
of the risk being hedged.
Foreign currency denominated assets and liabilities
• We generally utilize forward foreign exchange
contracts and purchased option contracts to hedge
these exposures.
• Changes in the value of these currency derivatives are
recorded in earnings together with the offsetting
foreign exchange gains and losses on the underlying
assets and liabilities.
Purchases of foreign-sourced inventory
• We generally utilize forward foreign exchange
contracts and purchased option contracts to hedge
these anticipated transactions. These contracts
generally mature in six months or less.
• Although these contracts are intended to
economically hedge foreign currency risks to the
extent possible, the differences between the contract
terms of our derivatives and the underlying forecasted
exposures have limited our ability to obtain hedge
accounting for all such derivatives. Accordingly,
changes in value for a majority of these derivatives
were recorded directly through earnings. However,
during 2007 we started to designate certain contracts
hedging our foreign currency denominated inventory
purchases as cash- flow hedges – see “Cash Flow
Hedges” below for additional information.
During 2007, 2006, and 2005, we recorded net
currency losses of $8, $39 and $5, respectively. Net
currency losses primarily result from the mark-to-market
of foreign exchange contracts utilized to hedge foreign
currency denominated assets and liabilities, the cost of
hedging foreign currency-denominated assets and
liabilities, the re-measurement of foreign currency-
denominated assets and liabilities and the
mark-to-market impact of economic hedges of
anticipated transactions for which we do not apply cash
flow hedge accounting treatment.
At December 31, 2007, we had outstanding forward
exchange and purchased option contracts with gross
notional values of $2,085. The following is a summary of
the primary hedging positions and corresponding fair
values held as of December 31, 2007:
Currency Hedged (Buy/Sell) (in millions)
Gross
Notional
Value
Fair Value
Asset
(Liability)
U.K. Pound Sterling/Euro ........... $ 534 $(12)
Euro/U.S. Dollar ................... 439 24
U.S. Dollar/Euro ................... 222 (7)
Swedish Kronor/Euro .............. 180 (5)
Swiss Franc/Euro .................. 156 1
Japanese Yen/U.S. Dollar .......... 132 (1)
Japanese Yen/Euro ................ 126 (2)
Euro/U.K. Pound Sterling ........... 39 1
U.S. Dollar/Canadian Dollar ........ 15 –
Canadian Dollar/Euro ............. 3 –
All Other ......................... 239 (2)
Total .......................... $2,085 $ (3)
Xerox Annual Report 2007 109