Callaway 2007 Annual Report Download - page 57

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Foreign Currency Fluctuations
In the normal course of business, the Company is exposed to foreign currency exchange rate risks (see
Note 8 to the Company’s Consolidated Condensed Financial Statements) that could impact the Company’s
results of operations. The Company’s risk management strategy includes the use of derivative financial
instruments, including forwards and purchase options, to hedge certain of these exposures. The Company’s
objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative
contracts used to hedge them, thereby reducing volatility of earnings. The Company does not enter into any
trading or speculative positions with regard to foreign currency related derivative instruments.
The Company is exposed to foreign currency exchange rate risk inherent primarily in its sales commitments,
anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar. The Company
transacts business in 12 currencies worldwide, of which the most significant to its operations are the European
currencies, Japanese Yen, Korean Won, Canadian Dollar, Australian Dollar and Chinese Renminbi. For most
currencies, the Company is a net receiver of foreign currencies and, therefore, benefits from a weaker U.S. dollar
and is adversely affected by a stronger U.S. dollar relative to those foreign currencies in which the Company
transacts significant amounts of business.
The Company enters into foreign exchange contracts to hedge against exposure to changes in foreign
currency exchange rates. Such contracts are designated at inception to the related foreign currency exposures
being hedged, which include anticipated intercompany sales of inventory denominated in foreign currencies,
payments due on intercompany transactions from certain wholly-owned foreign subsidiaries, and anticipated
sales by the Company’s wholly owned European subsidiary for certain Euro-denominated transactions. Hedged
transactions are denominated primarily in European currencies, Japanese Yen, Korean Won, Canadian Dollars
and Australian Dollars. To achieve hedge accounting, contracts must reduce the foreign currency exchange rate
risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk
management policies. Pursuant to its foreign exchange hedging policy, the Company may hedge anticipated
transactions and the related receivables and payables denominated in foreign currencies using forward foreign
currency exchange rate contracts and put or call options. Foreign currency derivatives are used only to meet the
Company’s objectives of minimizing variability in the Company’s operating results arising from foreign
exchange rate movements. The Company does not enter into foreign exchange contracts for speculative purposes.
Hedging contracts mature within 12 months from their inception.
At December 31, 2007, 2006 and 2005, the notional amounts of the Company’s foreign exchange contracts
used to hedge outstanding balance sheet exposures were approximately $31.1 million, $32.5 million and $35.6
million, respectively. At December 31, 2007, 2006 and 2005, there were no foreign exchange contracts
designated as cash flow hedges.
As part of the Company’s risk management procedure, a sensitivity analysis model is used to measure the
potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical
changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated
potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at
December 31, 2007 through its derivative financial instruments. The estimated maximum one-day loss from the
Company’s foreign currency derivative financial instruments, calculated using the sensitivity analysis model
described above is $3.3 million at December 31, 2007. The portion of the estimated loss associated with the
foreign exchange contracts that offset the remeasurement gain and loss of the related foreign currency
denominated assets and liabilities is $3.3 million at December 31, 2007 and would impact earnings. The
Company believes that such a hypothetical loss from its derivatives would be offset by increases in the value of
the underlying transactions being hedged. The sensitivity analysis model is a risk analysis tool and does not
purport to represent actual losses in earnings that will be incurred by the Company, nor does it consider the
potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that
may occur. Actual future gains and losses will differ from those estimated because of changes or differences in
market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.
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