Carnival Cruises 2008 Annual Report Download - page 102

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zero cost collar would change by $35 million, which would be offset by a corresponding change
of $35 million in the U.S. dollar value of the related foreign currency ship construction
contract and result in no net dollar impact to us.
At November 30, 2008, we have four euro-denominated shipbuilding commitments scheduled
for delivery between June 2009 and May 2011 and aggregating $1.5 billion assigned to two of
our U.S. dollar functional currency brands for which we have not entered into any foreign
currency forwards or options. Therefore, the U.S. dollar cost of these ships will increase
or decrease based upon changes in the exchange rate until the payments are made under the
shipbuilding contracts or we enter into foreign currency hedges. A portion of our net
investment in euro-denominated cruise operations effectively acts as an economic hedge
against a portion of these euro commitments. Accordingly, a portion of any increase or
decrease in our ship costs resulting from changes in the exchange rates will be offset by a
corresponding change in the net assets of our euro-denominated cruise operations. Based upon
a 10% hypothetical change in the U.S. dollar compared to the euro as of November 30, 2008,
assuming no changes in comparative interest rates, the unpaid cost of these ships would have
a corresponding change of $142 million.
At November 30, 2008, we have two euro-denominated shipbuilding commitments scheduled
for delivery in March and September 2010 and aggregating $1.3 billion assigned to two of our
sterling functional currency brands for which we have not entered into any foreign currency
contracts. Therefore, the sterling cost of these ships will increase or decrease based upon
changes in the exchange rate until the payments are made under the shipbuilding contracts or
we enter into foreign currency hedges. Based upon a 10% hypothetical change in the November
30, 2008 sterling to euro foreign currency exchange rate, assuming no changes in comparative
interest rates and assuming the U.S. dollar exchange rate to the sterling remains constant,
the unpaid cost of these ships would have a corresponding change of $122 million.
Our decisions regarding whether or not to hedge a given ship commitment for our North
American and UK brands are made on a case-by-case basis, taking into consideration the amount
and duration of the exposure, market volatility, exchange rate correlation, economic trends
and other offsetting risks.
The cost of shipbuilding orders that we may place in the future for our cruise lines
that generate their cash flows in a currency that is different than the shipyard's operating
currency, generally the euro, is expected to be affected by foreign currency exchange rate
fluctuations. Given the movement in the U.S. dollar and sterling relative to the euro over
the past several years, the U.S. dollar and sterling cost to order new cruise ships has been
volatile. If the U.S. dollar or sterling declines against the euro, this may affect our
ability to order future new cruise ships for U.S. dollar or sterling functional currency
brands.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our investment and debt
portfolio management strategies. These strategies include purchasing high quality short-term
investments with variable interest rates, and evaluating our debt portfolio to make periodic
adjustments to the mix of variable and fixed rate debt through the use of interest rate swaps
and the issuance of new debt. At November 30, 2008 and 2007, 74% and 69% of the interest
cost on our debt was fixed and 26% and 31% was variable, including the effect of our interest
rate swaps, respectively.
Specifically, we have an interest rate swap at November 30, 2008, which effectively
changed $96 million of fixed rate debt to LIBOR-based floating rate debt. The fair value of
our debt and interest rate swaps at November 30, 2008 was $7.4 billion. Based upon a
hypothetical 10% change in the November 30, 2008 market interest rates, assuming no change in
currency exchange rates, the fair value of our debt and interest rate swap would change by
approximately $118 million. In addition, based upon a hypothetical 10% change in the
November 30, 2008 interest rates, our annual interest expense on variable rate debt,
including the effect of our interest rate swaps, would change by approximately $7 million.
In addition, based upon a hypothetical 10% change in Carnival Corporation's November 30,
2008 common stock price, the fair value of our convertible notes would have a corresponding
change of approximately $6 million.