Carnival Cruises 2014 Annual Report Download - page 36

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. While we will continue to monitor our exposure to these economic risks, we do not currently
hedge our foreign currency exchange risks with derivative or nonderivative financial instruments, with the
exception of certain of our ship commitments and net investments in foreign operations. The financial impacts of
the hedging instruments we do employ generally offset the changes in the underlying exposures being hedged.
Operational Currency Risks
Our European and Australian cruise brands generate significant revenues and incur significant expenses in their
euro, sterling or Australian dollar functional currency, which subjects us to “foreign currency translational” risk
related to these currencies. 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 strengthening of the U.S. dollar against these foreign currencies has
the financial statement effect of decreasing the U.S. dollar values reported for these cruise brands’ revenues and
expenses. Any weakening of the U.S. dollar has the opposite effect.
Most of our brands also 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 principally includes the euro,
sterling and Australian and U.S. dollars. In addition, all of our brands have non-functional currency expenses for
a portion of their operating expenses. Accordingly, we also have “foreign currency transactional” risks related to
changes in the exchange rates for our brands’ revenues and expenses that are in a currency other than their
functional currency. However, these brands’ revenues and expenses in non-functional currencies create some
degree of natural offset from these currency exchange movements. In addition, we monitor this foreign currency
transactional risk in order to measure its impact on our results of operations.
Investment Currency Risks
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
foreign currency intercompany payables in our foreign operations’ functional currencies, substantially all
sterling. As of November 30, 2014 and 2013, we have designated $2.4 billion and $2.2 billion, respectively, of
our foreign currency intercompany payables as nonderivative hedges of our net investments in foreign
operations. Accordingly, we have included $359 million and $234 million of cumulative foreign currency
transaction nonderivative gains in the cumulative translation adjustment component of AOCI at November 30,
2014 and 2013, respectively, which offsets a portion of the losses recorded in AOCI upon translating our foreign
operations’ net assets into U.S. dollars. During 2014, 2013 and 2012, we recognized foreign currency
nonderivative transaction gains (losses) of $125 million, $(9) million and $39 million, respectively, in the
cumulative translation adjustment component of AOCI.
Newbuild Currency Risks
Our shipbuilding contracts are typically denominated in euros. 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, economic trends, our overall expected
net cash flows by currency and other offsetting risks. We use foreign currency derivative contracts and have used
nonderivative financial instruments to manage foreign currency exchange rate risk for some of our ship
construction payments.
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