Boeing 2006 Annual Report Download - page 42

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Interest Rate Risk
We have financial instruments that are subject to interest rate
risk, principally investments, fixed-rate debt obligations, and
customer financing assets and liabilities. Historically, we have
not experienced material gains or losses on these instruments
due to interest rate changes. Additionally, Boeing Capital
Corporation (BCC) uses interest rate swaps with certain debt
obligations to manage exposure to interest rate changes.
The principal source of BCC’s market risk relates to interest rate
changes. This risk is managed by matching the profile of BCC’s
liabilities with the profile of assets. Any exposure to mismatch
risk is measured and managed with the use of interest rate
derivatives. We do not use interest rate derivatives for specula-
tive or trading purposes. Although many of the assets, liabilities
and derivatives affected by a change in interest rates are not
traded, if we had an immediate, one-time, 100 basis-point
increase in market rates at December 31, 2006, we estimated
that the tax-adjusted net fair value of these items would have
decreased by $9 million compared to a decrease of $15 million
at December 31, 2005.
Based on the portfolio of other Boeing existing debt, the
unhedged exposure to interest rate risk is not material. The
investors in the fixed-rate debt obligations that we issue do not
generally have the right to demand we pay off these obligations
prior to maturity. Therefore, exposure to interest rate risk is not
believed to be material for our fixed-rate debt.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers in foreign
currencies. We use foreign currency forward and option con-
tracts to hedge the price risk associated with firmly committed
and forecasted foreign denominated payments and receipts
related to our ongoing business. Foreign currency contracts are
sensitive to changes in foreign currency exchange rates. At
December 31, 2006, a 10% unfavorable exchange rate move-
ment in our portfolio of foreign currency contracts would have
reduced our unrealized gains by $69 million. Consistent with the
use of these contracts to neutralize the effect of exchange rate
fluctuations, such unrealized losses or gains would be offset by
corresponding gains or losses, respectively, in the remeasure-
ment of the underlying transactions being hedged. When taken
together, these forward currency contracts and the offsetting
underlying commitments do not create material market risk.
40 The Boeing Company and Subsidiaries
Quantitative and Qualitative Disclosures About Market Risk