Coach 2008 Annual Report Download - page 36

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TABLE OF CONTENTS
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from
adverse changes in interest rates or foreign currency exchange rates. Coach manages these exposures through operating and financing
activities and, when appropriate, through the use of derivative financial instruments with respect to Coach Japan. The use of derivative
financial instruments is in accordance with Coach’s risk management policies. Coach does not enter into derivative transactions for
speculative or trading purposes.
The following quantitative disclosures are based on quoted market prices obtained through independent pricing sources for the same or
similar types of financial instruments, taking into consideration the underlying terms and maturities and theoretical pricing models. These
quantitative disclosures do not represent the maximum possible loss or any expected loss that may occur, since actual results may differ
from those estimates.
Foreign Currency Exchange
Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency
other than the entity’s functional currency, and from foreign-denominated revenues and expenses translated into U.S. dollars.
Substantially all of Coach’s fiscal 2009 non-licensed product needs were purchased from independent manufacturers in countries other
than the United States. These countries include China, Italy, United States, Hong Kong, India, Thailand, Vietnam, Turkey, Philippines,
Ecuador, Malaysia, Mauritius, Peru, Spain and Taiwan. Additionally, sales are made through international channels to third party
distributors. Substantially all purchases and sales involving international parties, excluding Coach Japan and Coach China, are
denominated in U.S. dollars and, therefore, are not subject to foreign currency exchange risk.
In Japan, Coach is exposed to market risk from foreign currency exchange rate fluctuations as a result of Coach Japan’s U.S. dollar-
denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily zero-cost collar options,
to manage these risks. The foreign currency contracts entered into by the Company have durations no greater than 12 months. As of June
27, 2009 and June 28, 2008, open foreign currency forward contracts designated as hedges with a notional amount of $32.0 million and
$233.9 million, respectively, were outstanding.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its
$231.0 million U.S. dollar-denominated fixed rate intercompany loan from Coach. To manage this risk, on July 1, 2005, Coach Japan
entered into a cross currency swap transaction, the terms of which include an exchange of a U.S. dollar fixed interest rate for a yen fixed
interest rate. The loan matures in 2010, at which point the swap requires an exchange of yen and U.S. dollar based principals.
The fair value of open foreign currency derivatives included in current assets at June 27, 2009 and June 28, 2008 was $0 and $7.9
million, respectively. The fair value of open foreign currency derivatives included in current liabilities at June 27, 2009 and June 28, 2008
was $37.1 million and $5.5 million, respectively. The fair value of these contracts is sensitive to changes in yen exchange rates.
Coach believes that exposure to adverse changes in exchange rates associated with revenues and expenses of foreign operations, which
are denominated in Japanese Yen, Chinese Renminbi, Hong Kong Dollar, Macau Pataca and Canadian Dollars, are not material to the
Company’s consolidated financial statements.
Interest Rate
Coach is exposed to interest rate risk in relation to its investments, revolving credit facilities and long-term debt.
The Company’s investment portfolio is maintained in accordance with the Company’s investment policy, which identifies allowable
investments, specifies credit quality standards and limits the credit exposure of any single issuer. The primary objective of our investment
activities is the preservation of principal while maximizing interest income and minimizing risk. We do not hold any investments for trading
purposes. The Company’s investment portfolio consists of U.S. government and agency securities as well as municipal
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