Cardinal Health 2008 Annual Report Download - page 84

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Item 7A: Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to cash flow and earnings fluctuations as a result of certain market risks. These
market risks primarily relate to foreign exchange, interest rate, and commodity related changes. The Company
maintains a comprehensive hedging program to manage volatility related to these market exposures. It employs
operational, economic, and derivative financial instruments in order to mitigate risk. See Notes 1 and 14 of
“Notes to Consolidated Financial Statements” for further discussion regarding the Company’s use of derivative
instruments.
Foreign Exchange Rate Sensitivity
By nature of the Company’s global operations, it is exposed to cash flow and earnings fluctuations resulting
from foreign exchange rate variation. These exposures are transactional and translational in nature. Since the
Company manufactures and sells its products throughout the world, its foreign currency risk is diversified.
Principal drivers of this diversified foreign exchange exposure include the Canadian dollar, European euro,
Mexican peso, Thai baht, British pound, and Australian dollar.
Transactional Exposure
The Company’s transactional exposure arises from the purchase and sale of goods and services in currencies
other than the functional currency of the parent or its subsidiaries. As part of its risk management program, at the
end of each fiscal year the Company performs a sensitivity analysis on its forecasted transactional exposure for
the upcoming fiscal year. The fiscal 2008 analysis utilizes a currency portfolio model, encompassing both
implied volatility and historical correlation to estimate the net potential gain or loss. The fiscal 2007 analysis
utilizes an implied volatility measurement for each currency to estimate the net potential gain or loss. These
analyses included the estimated impact of its hedging program, which mitigates the Company’s transactional
exposure. At June 30, 2008 and 2007, the Company had hedged approximately 45% and 46%, respectively, of its
transactional exposures. The following table summarizes the analysis as it relates to the Company’s transactional
exposure (in millions):
2008 2007
Net estimated transactional exposure .................................... $725.6 $667.4
Sensitivity gain/loss ................................................. 53.5 45.6
Estimated offsetting impact of hedges ................................... (25.0) (20.6)
Estimated net gain/loss ............................................... $ 28.5 $ 25.0
Translational Exposure
The Company also has exposure related to the translation of financial statements of its foreign divisions into
U.S. dollars, the functional currency of the parent. It performs a similar analysis as described above related to this
translational exposure. The Company does not typically hedge any of its translational exposure and no hedging
impact was included in the Company’s analysis at June 30, 2008 and 2007. The following table summarizes the
Company’s translational exposure and the impact of a hypothetical 10% strengthening or weakening in the
U.S. dollar (in millions):
2008 2007
Net estimated translational exposure .................................... $219.0 $175.5
Sensitivity gain/loss ................................................. 21.9 17.6
Interest Rate Sensitivity
The Company is exposed to changes in interest rates primarily as a result of its borrowing and investing
activities to maintain liquidity and fund business operations. The nature and amount of the Company’s long-term
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