Cardinal Health 2010 Annual Report Download - page 91

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We also extend loans to our customers which are subsequently sold to a bank. The bank services and
administers these loans as well as any new loans we may direct. In order for the bank to purchase such loans, i
t
r
equires the absolute and unconditional obligation that we repurchase such loans upon the occurrence of certain
events described in the agreement including, but not limited to, borrower payment default that exceeds 90 days,
insolvency and bankruptcy. At June 30, 2010 and 2009, notes in the program subject to our guaranty totale
d
$
41.4 million and
$
39.9 million, respectively. These loans are reported in our consolidated balance sheets.
1
2. FINAN
C
IAL IN
S
TR
U
MENT
S
We utilize derivative financial instruments to manage exposure to certain risks related to our ongoin
g
o
perations. The primary risks managed through the use of derivative instruments include interest rate risk,
currency exchange risk and commodity price risk. We do not use derivative instruments for trading or
speculative purposes. While the majority of our derivative instruments are designated as hedging instruments, we
also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedgin
g
instruments. These derivative instruments are adjusted to current fair value through earnings at the end of each
p
eriod.
Interest Rate Risk Management
.
We are exposed to the impact of interest rate changes. Our objective is to
manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize
a
mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. I
n
addition, we enter into interest rate swaps to further manage our exposure to interest rate variations related to our
borrowings and to lower our overall borrowing costs.
C
urrency Risk Management. We conduct business in several major international currencies and are subjec
t
to risks associated with changing foreign exchange rates. Our objective is to reduce earnings and cash flo
w
volatility associated with foreign exchange rate changes to allow management to focus its attention on business
o
perations. Accordingly, we enter into various contracts that change in value as foreign exchange rates change to
p
rotect the value of existing foreign currency assets and liabilities, commitments and anticipated foreign currenc
y
r
evenue and ex
p
enses.
C
ommodity Price Risk Management
.
W
e are exposed to changes in the price of certain commodities. Our
o
bjective is to reduce earnings and cash flow volatility associated with forecasted purchases of thes
e
commodities to allow management to focus its attention on business operations. Accordingly, we enter int
o
derivative contracts to manage the price risk associated with these forecasted purchases
.
We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have
established and maintain strict counterparty credit guidelines and enter into derivative instruments only wit
h
major financial institutions that are investment grade or better. We do not have significant exposure to any one
counterparty and management believes the risk of loss is remote and, in any event, would not be material.
Additionally, we do not require collateral under these agreements.
65