Carnival Cruises 2008 Annual Report Download - page 101

F-42
rate risks. At November 30, 2008, the fair value of these foreign currency forwards was an
unrealized gain of $13 million, which is recorded in AOCI, which offsets a portion of the
losses recorded in AOCI upon translating our foreign subsidiaries' net assets into U.S.
dollars. The forwards mature through 2017. Based upon a 10% hypothetical change in the
November 30, 2008 foreign currency exchange rates, assuming no changes in comparative
interest rates, we estimate that these foreign currency contracts' fair values would change
by $28 million, which would be offset by a corresponding change of $28 million in the U.S.
dollar value of our net investments.
Finally, at November 30, 2008 we have three foreign currency swaps that were designated
as cash flow hedges and effectively converted $398 million of U.S. dollar fixed interest rate
debt into sterling fixed interest rate debt. Sterling is the functional currency of our
operation that has the obligation to repay this debt. At November 30, 2008, the fair value
of these foreign currency swaps was an unrealized gain of $104 million. Subsequent to
November 30, 2008, we closed out of these foreign currency swaps and thus re-aligned the debt
with the parent company's U.S. dollar functional currency.
Newbuild Currency Risk
The majority of our newbuild capacity on order is for our Costa and AIDA European
brands, for which we do not have significant currency risk because all our ships are
contracted for in euros, which is these brands' functional currency. However, our U.S.
dollar functional currency brands, comprised of Carnival Cruise Lines, Princess, Holland
America Line and Seabourn, and our sterling functional currency brands, comprised of P&O
Cruises and Cunard, have foreign currency exchange rate risks related to our outstanding or
possible future commitments under ship construction contracts denominated in euros. These
foreign currency commitments are affected by fluctuations in the value of the functional
currency as compared to the currency in which the shipbuilding contract is denominated. We
use foreign currency contracts and have used nonderivative financial instruments to manage
foreign currency exchange rate risk for some of our ship construction contracts (see Notes 2,
6 and 10 in the accompanying financial statements). Accordingly, increases and decreases in
the fair value of these foreign currency contracts offset changes in the fair value of the
foreign currency denominated ship construction commitments, thus resulting in the elimination
of such risk.
During 2008, we entered into foreign currency forwards and options that are designated
as cash flow hedges for the remaining euro-denominated shipyard payments for Carnival Dream
in order to effectively lock in a maximum exchange rate of $1.584 to the euro. Accordingly,
we will have a maximum payment of $723 million, inclusive of the option premium for Carnival
Dream's remaining shipyard payments. However, unlike foreign currency forwards as a result
of the currency options, which are for 50% of these remaining shipyard payments, we will
benefit if the dollar exchange rate is below $1.584 to the euro. At November 30, 2008, the
fair value of these foreign currency options and forwards, which mature through September
2009, was a realized and unrealized net loss of $66 million which is recorded, along with an
offsetting $66 million amount recognized in AOCI, on our accompanying 2008 balance sheet.
Based upon a 10% hypothetical weakening or strengthening of the U.S. dollar compared to the
euro as of November 30, 2008, assuming no changes in comparative interest rates, the
estimated aggregated fair value of these foreign currency forwards and options would increase
by $46 million or decrease by $35 million, respectively, which would be offset by a decrease
of $46 million or increase of $35 million, respectively, in the U.S. dollar value of the
related foreign currency ship construction contract and result in no net dollar impact to us.
Also, during 2008 we entered into a call option and a put option that were designed as a
zero cost collar, and are collectively designated as a cash flow hedge of Nieuw Amsterdam's
final shipyard payment. Under this zero cost collar the minimum exchange rate we would be
required to pay is $1.28 to the euro and the maximum exchange rate we would be required to
pay is $1.45 to the euro. If the spot rate is in between these two amounts on the date of
delivery, then we would not owe or receive any payments under this zero cost collar. At
November 30, 2008, the fair value of this zero cost collar was an unrealized net loss of $20
million, which was recorded in AOCI and it matures in June 2010. Based upon a 10%
hypothetical change of the U.S. dollar compared to the euro as of November 30, 2008, assuming
no changes in comparative interest rates, the estimated fair value of this foreign currency