Carnival Cruises 2010 Annual Report Download - page 28

dollar currencies results in both decreased revenues and expenses, and the weakening of the U.S. dollar against
these non-U.S. dollar currencies has the opposite effect, resulting in some degree of natural offset due to currency
exchange movements in our accompanying Consolidated Statements of Income for these transactional currency
gains and losses.
We consider our investments in foreign operations to be denominated in relatively stable currencies and of a
long-term nature. We partially address our net investment currency exposures by denominating a portion of our
debt and other obligations, including the effect of foreign currency forwards and swaps, in our foreign
operations’ functional currencies, generally the euro or sterling. As of November 30, 2010 and 2009, we have
designated $3.0 billion and $3.8 billion of our euro and sterling debt and other obligations, respectively, which
debt matures through 2019, as nonderivative hedges of our net investments in foreign operations. Accordingly,
we have included $519 million and $(88) million of cumulative foreign currency transaction gains and (losses) in
the cumulative translation adjustment component of AOCI at November 30, 2010 and 2009, respectively, which
offsets a portion of the losses and gains recorded in AOCI upon translating our foreign operations’ net assets into
U.S. dollars. During fiscal 2010, 2009 and 2008, we recognized foreign currency transaction gains and (losses) of
$607 million, $(407) million and $691 million, respectively, in the cumulative translation adjustment component
of AOCI.
Newbuild Currency Risk
At November 30, 2010, 25% of our newbuild passenger capacity under euro-denominated contracts are exposed
to currency risk, which is comprised of two Princess newbuilds expected to be delivered in May 2013 and May
2014. At November 30, 2010, 62% of our newbuild passenger capacity under contract is for our European and
North American cruise brands that do not have significant currency risk because all of these ships are contracted
for in euros or U.S. dollars, which are the functional currencies of these brands, or the non-functional currency
new ship progress payments have already been made. We also have U.S. dollar and sterling functional currency
brands that could have newbuild contracts with foreign currency exchange rate risks related to our outstanding or
possible future commitments under ship construction contracts denominated in euros. We use foreign currency
derivative contracts and have used nonderivative financial instruments to manage foreign currency exchange rate
risk for these types of ship construction contracts. At November 30, 2010, 13% of our newbuild passenger
capacity under contract that would otherwise be exposed to currency risk is hedged and, accordingly, changes in
the fair value of these foreign currency derivative contracts offset changes in the fair value of the foreign
currency denominated ship construction commitments, thus resulting in the elimination of such risk.
Our decisions regarding whether or not to hedge a non-functional currency ship commitment for our cruise
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, our overall expected net cash flows by currency
and other offsetting risks.
The cost of shipbuilding orders that we may place in the future for our cruise brands that generate their cash
flows in a currency that is different than the shipyard’s operating currency, which is 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 desire 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 floating interest rates,
and evaluating our debt portfolio to make periodic adjustments to the mix of fixed and floating rate debt through
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