Carnival Cruises 2011 Annual Report Download - page 29

Foreign Currency Exchange Rate Risks
Overall Strategy
We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating and
financing activities, including netting certain exposures to take advantage of any natural offsets and, when
considered appropriate, through the use of derivative and nonderivative financial instruments. Our primary focus
is to manage the economic foreign currency exchange risks faced by our operations, which are the ultimate
foreign currency exchange risks that would be realized by us if we exchanged one currency for another, and not
accounting risks. Accordingly, we do not currently hedge foreign currency exchange accounting risks with
derivative financial instruments. The financial impacts of the hedging instruments we do employ generally offset
the changes in the underlying exposures being hedged.
Operational and Investment Currency Risks
The growth of our European and Australian cruise brands subjects us to an increasing level of foreign currency
translation risk related to the euro, sterling and Australian dollar because these brands generate significant
revenues and incur significant expenses in euro, sterling or the Australian dollar. Accordingly, exchange rate
fluctuations of the euro, sterling and Australian dollar against the U.S. dollar will affect our reported financial
results since the reporting currency for our consolidated financial statements is the U.S. dollar. Any weakening of
the U.S. dollar against these foreign currencies has the financial statement effect of increasing the U.S. dollar
values reported for cruise revenues and expenses. Strengthening of the U.S. dollar has the opposite effect.
Most of our brands have non-functional currency risk related to their international sales operations, which has
become an increasingly larger part of most of their businesses over time, and primarily includes the euro, sterling
and Australian, Canadian and U.S. dollars. In addition, all of our brands have non-functional currency expenses
for a portion of their operating expenses. Accordingly, these brands’ revenues and expenses in non-functional
currencies create some degree of natural offset for recognized transactional currency gains and losses due to
currency exchange movements.
We consider our investments in foreign operations to be denominated in relatively stable currencies and of a
long-term nature. We partially mitigate our net investment currency exposures by denominating a portion of our
debt and other obligations, including the effect of foreign currency forwards, in our foreign operations’
functional currencies, generally the euro or sterling. As of November 30, 2011 and 2010, we have designated
$3.6 billion and $3.0 billion of our euro and sterling debt and other obligations, respectively, which debt matures
through 2021, as nonderivative hedges of our net investments in foreign operations. Accordingly, we have
included $204 million and $183 million of cumulative foreign currency transaction gains in the cumulative
translation adjustment component of AOCI at November 30, 2011 and 2010, respectively, which offsets a portion
of the losses recorded in AOCI upon translating our foreign operations’ net assets into U.S. dollars. During fiscal
2011, 2010 and 2009, we recognized foreign currency transaction gains and (losses) of $21 million, $271 million
and $(407) million, respectively, in the cumulative translation adjustment component of AOCI.
Newbuild Currency Risks
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, currency exchange rate correlation, economic trends, our overall expected net cash flows by
currency and other offsetting risks. Our shipbuilding contracts are typically denominated in euros. In the past, we
have used foreign currency derivative contracts and nonderivative financial instruments to manage foreign
currency exchange rate risk for some of these ship construction contracts.
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