Cardinal Health 2010 Annual Report Download - page 62

determined using a lattice valuation model. We believe the lattice model provides for better estimates because i
t
has the ability to take into account employee exercise patterns based on changes in our stock price and othe
r
variables and it provides for a range of input assumptions.
During 2010, we calculated separate option valuations for two separate groups of employees. During fiscal
2009 and 2008, we calculated separate option valuations for three separate groups of employees. The groups
were determined using similar historical exercise behaviors. The expected life of the options granted wa
s
calculated from the option valuation model and represents the length of time in years that the options granted ar
e
expected to be outstanding. Expected volatilities are based on implied volatility from traded options on our
Common Shares and historical volatility over a period of time commensurate with the contractual term of the
o
ption grant (7 years). As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when a
n
award vests. The actual forfeitures in future reporting periods could be higher or lower than our current
estimates
.
I
tem 7A:
Q
uantitative and Qualitative Disclosures about Market Ris
k
Our businesses are 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. We maintain
a
comprehensive hedging program to manage volatility related to these market exposures which employs
o
perational, economic, and derivative financial instruments in order to mitigate risk. See Notes 1 and 12 of
“Notes to Consolidated Financial Statements” for further discussion regarding our use of derivative instruments
.
Forei
g
n Exchan
g
e Rate
S
ensitivity
By nature of our global operations, our businesses are exposed to cash flow and earnings fluctuations
r
esulting from foreign exchange rate variation. These exposures are transactional and translational in nature.
Since we manufacture and sell products throughout the world, our foreign currency risk is diversified. Principal
drivers of this diversified foreign exchange exposure include the Canadian dollar, European euro, Mexican peso,
and Thai baht
.
T
ransactional Exposure
Our businesses’ transactional exposure arises from the purchase and sale of goods and services in currencies
o
ther than our functional currency or the functional currency of our subsidiaries. As part of our risk managemen
t
p
rogram, at the end of each fiscal year we perform a sensitivity analysis on our forecasted transactional exposure
f
or the upcoming fiscal year. The fiscal 2010 and fiscal 2009 analyses utilize a currency portfolio model,
encompassing both implied volatility and historical correlation to estimate the net potential gain or loss. These
analyses included the estimated impact of our hedging program, which mitigates our businesses’ transactional
exposure. At June 30, 2010 and 2009, we had hedged approximately 4
5
% and 46%, respectively, of our
businesses’ transactional exposures. The following table summarizes the analysis as it relates to our businesses’
transactional ex
p
osure (in millions)
:
2010
2009
Net estimated transactional ex
p
osur
e
..............................................
$
318.9
$
336.
9
Sensitivity gain/los
s
...........................................................
$
35.3
$
45.4
Estimated offsetting impact of hedges
.............................................
(17.8) (22.
5)
Est
i
mate
d
net
g
a
i
n/
l
oss
.
........................................................
$
1
7.5
$
22.
9
T
rans
l
ationa
l
Exposure
Our
b
us
i
nesses a
l
so
h
ave exposure re
l
ate
d
to t
h
e trans
l
at
i
on o
ffi
nanc
i
a
l
statements o
f
our
f
ore
ig
n
di
v
i
s
i
on
s
i
nto U.S.
d
o
ll
ars, our
f
unct
i
ona
l
currenc
y
. We per
f
orm a s
i
m
il
ar ana
ly
s
i
sas
d
escr
ib
e
d
a
b
ove re
l
ate
d
to t
hi
s
36