Estee Lauder 2009 Annual Report Download - page 112

in asset positions, which totaled $41.2 million at June 30,
2009. To manage this risk, we have established strict
counterparty credit guidelines that are continually
monitored and reported to management. Accordingly,
management believes risk of loss under these hedging
contracts is remote.
Certain of our derivative fi nancial instruments contain
credit-risk-related contingent features. As of June 30,
2009, we were in compliance with such features and
there were no derivative financial instruments with
credit-risk-related contingent features that were in a net
liability position.
THE EST{E LAUDER COMPANIES INC. 111
Market Risk
We use a value-at-risk model to assess the market risk of our derivative fi nancial instruments. Value-at-risk rep resents the
potential losses for an instrument or portfolio from adverse changes in market factors for a specifi ed time period and
confi dence level. We estimate value- at-risk across all of our derivative fi nancial instruments using a model with historical
volatilities and correlations calculated over the past 250-day period. The high, low and average measured value-at-risk
for the twelve months ended June 30, 2009 and 2008 related to our foreign exchange and interest rate contracts are
as follows:
JUNE 30, 2009 JUNE 30, 2008
(In millions) High Low Average High Low Average
Foreign exchange contracts $28.4 $14.2 $21.6 $18.8 $ 5.3 $11.3
Interest rate contracts 34.3 23.0 29.5 28.8 12.6 20.0
The change in the value-at-risk measures from the prior
year related to our foreign exchange contracts refl ected
an increase in foreign exchange volatilities and a different
portfolio mix. The change in the value-at-risk measures
from the prior year related to our interest rate contracts
refl ected higher interest rate volatilities. The model esti-
mates were made assuming normal market conditions
and a 95 percent confi dence level. We used a statistical
simulation model that valued our derivative fi nancial
instruments against one thousand randomly generated
market price paths.
Our calculated value-at-risk exposure represents an
esti mate of reasonably possible net losses that would be
recognized on our portfolio of derivative fi nancial instru-
ments assuming hypothetical movements in future market
rates and is not necessarily indicative of actual results,
which may or may not occur. It does not represent the
maximum possible loss or any expected loss that may
occur, since actual future gains and losses will differ from
those estimated, based upon actual fl uctuations in market
rates, operating exposures, and the timing thereof, and
changes in our portfolio of derivative fi nancial instruments
during the year.
We believe, however, that any such loss incurred would
be offset by the effects of market rate movements on the
respective underlying transactions for which the deriva-
tive fi nancial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a
material current or future effect upon our fi nancial condi-
tion or results of operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In May 2009, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS
No. 165”). SFAS No. 165 requires the disclosure of the
date through which an entity has evaluated subsequent
events for potential recognition or disclosure in the fi nan-
cial statements and whether that date represents the date
the fi nancial statements were issued or were available to
be issued. This standard also provides clarifi cation about
circumstances under which an entity should recognize
events or transactions occurring after the balance sheet
date in its fi nancial statements and the disclosures that an
entity should make about events or transactions that
occurred after the balance sheet date. This standard is
effective for interim and annual periods beginning with
our fi scal year ended June 30, 2009. The adoption of this
standard did not have a material impact on our consoli-
dated fi nancial statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities— an amendment of FASB Statement No. 133”
(“SFAS No. 161”). SFAS No. 161 requires companies to
provide qualitative disclosures about their objectives and
strategies for using derivative instruments, quantitative
disclosures of the fair values of, and gains and losses on,
these derivative instruments in a tabular format, as well as
more information about liquidity by requiring disclosure
of a derivative contract’s credit-risk-related contingent