DuPont 2008 Annual Report Download - page 48

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instruments
Derivatives and Other Hedging Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to hedge its
exposure to foreign currency, interest rate and commodity price risks under established procedures and controls.
Derivative instruments utilized include forwards, options, futures and swaps. The counterparties to these contractual
arrangements are major financial institutions and major commodity exchanges.
The company hedges certain foreign currency denominated revenues, monetary assets and liabilities, certain
business-specific foreign currency exposures and certain energy and agricultural feedstock purchases.
Concentration of Credit Risk
Financial instruments that potentially subject the company to significant concentrations of credit risk consist
principally of cash, investments, accounts receivable and derivatives.
As part of the company’s risk management processes, it continuously evaluates the relative credit standing of all of
the financial institutions that service DuPont and monitors actual exposures versus established limits. The company
has not sustained credit losses from instruments held at financial institutions.
The company maintains cash and cash equivalents, marketable securities, derivatives and certain other financial
instruments with various financial institutions. These financial institutions are generally highly rated and
geographically dispersed and the company has a policy to limit the dollar amount of credit exposure with any
one institution.
The company’s sales are not materially dependent on a single customer or small group of customers. As of
December 31, 2008, no one individual customer balance represented more than 5 percent of the company’s total
outstanding receivables balance. Credit risk associated with its receivables balance is representative of the
geographic, industry and customer diversity associated with the company’s global businesses.
The company also maintains strong credit controls in evaluating and granting customer credit. As a result, it may
require that customers provide some type of financial guarantee in certain circumstances. Length of terms for
customer credit varies by industry and region.
Foreign Currency Risk
The company’s objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow
volatility associated with foreign currency rate changes. Accordingly, the company enters into various contracts that
change in value as foreign exchange rates change to protect the U.S. Dollar value of its existing foreign currency-
denominated assets, liabilities, commitments, and cash flows.
The company uses foreign currency exchange contracts to offset its net exposures, by currency, related to the
foreign currency-denominated monetary assets and liabilities of its operations. The primary business objective of
this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains
and losses resulting from exchange rate changes, net of related tax effects, are minimized. The company also uses
foreign currency exchange contracts to offset a portion of the company’s exposure to certain foreign currency-
denominated revenues so that gains and losses on these contracts offset changes in the U.S. Dollar value of the
related foreign currency-denominated revenues. The objective of the hedge program is to reduce earnings and cash
flow volatility related to changes in foreign currency exchange rates.
The following table summarizes the impacts of this program on the company’s results of operations for the years
ended December 31, 2008, 2007 and 2006, and includes the company’s pro rata share of its equity affiliates’
exchange gains and losses and corresponding gains and losses on foreign currency exchange contracts.
(Dollars in millions) 2008 2007 2006
Pre-tax exchange loss $(255) $(85) $ (4)
Tax (expense)/benefit 83 54 (26)
After-tax loss $(172) $(31) $(30)
46
Part II