International Paper 2012 Annual Report Download - page 69

trading purposes. Information related to International
Paper’s debt obligations is included in Note 12 Debt
and Lines of Credit on pages 72 and 73 of Item 8.
Financial Statements and Supplementary Data. A
discussion of derivatives and hedging activities is
included in Note 13 Derivatives and Hedging Activ-
ities on pages 73 through 77 of Item 8. Financial
Statements and Supplementary Data.
The fair value of our debt and financial instruments
varies due to changes in market interest and foreign
currency rates and commodity prices since the
inception of the related instruments. We assess this
market risk utilizing a sensitivity analysis. The sensi-
tivity analysis measures the potential loss in earn-
ings, fair values and cash flows based on a
hypothetical 10% change (increase and decrease) in
interest and currency rates and commodity prices.
Interest Rate Risk
Our exposure to market risk for changes in interest
rates relates primarily to short- and long-term debt
obligations and investments in marketable securities.
We invest in investment-grade securities of financial
institutions and money market mutual funds with a
minimum rating of AAA and limit exposure to any
one issuer or fund. Our investments in marketable
securities at December 31, 2012 and 2011 are stated
at cost, which approximates market due to their
short-term nature. Our interest rate risk exposure
related to these investments was not material.
We issue fixed and floating rate debt in a proportion
consistent with International Paper’s targeted capital
structure, while at the same time taking advantage of
market opportunities to reduce interest expense as
appropriate. Derivative instruments, such as interest
rate swaps, may be used to implement this capital
structure. At December 31, 2012 and 2011, the net
fair value liability of financial instruments with
exposure to interest rate risk was approximately
$11.8 billion and $10.5 billion, respectively. The
potential loss in fair value resulting from a 10%
adverse shift in quoted interest rates would have
been approximately $642 million and $505 million at
December 31, 2012 and 2011, respectively.
Commodity Price Risk
The objective of our commodity exposure manage-
ment is to minimize volatility in earnings due to large
fluctuations in the price of commodities. Commodity
swap and option contracts have been used to man-
age risks associated with market fluctuations in
energy prices. The net fair value liability of such
outstanding energy hedge contracts at December 31,
2012 and 2011 was approximately $1 million and $10
million, respectively. The potential loss in fair value
resulting from a 10% adverse change in the under-
lying commodity prices would have been approx-
imately $1 million and $2 million at December 31,
2012 and 2011, respectively.
Foreign Currency Risk
International Paper transacts business in many cur-
rencies and is also subject to currency exchange rate
risk through investments and businesses owned and
operated in foreign countries. Our objective in
managing the associated foreign currency risks is to
minimize the effect of adverse exchange rate
fluctuations on our after-tax cash flows. We address
these risks on a limited basis by financing a portion
of our investments in overseas operations with bor-
rowings denominated in the same currency as the
operation’s functional currency, or by entering into
cross-currency and interest rate swaps, or foreign
exchange contracts. At December 31, 2012 and 2011 ,
the net fair value liability of financial instruments
with exposure to foreign currency risk was approx-
imately $13 million and $52 million, respectively. The
potential loss in fair value for such financial instru-
ments from a 10% adverse change in quoted foreign
currency exchange rates would have been approx-
imately $49 million and $59 million at December 31,
2012 and 2011, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See the preceding discussion and Note 13
Derivatives and Hedging Activities on pages 73
through 77 of Item 8. Financial Statements and Sup-
plementary Data.
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