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39
impact associated with non-functional currency
financial assets and liabilities. Indirect impacts include
the change in competitiveness of imports into, and
exports out of, the United States (and the impact on
local currency pricing of products that are traded
internationally). In general, a weaker U.S. dollar and
stronger local currency is beneficial to International
Paper. The currencies that have the most impact are
the Euro, the Brazilian real, the Polish zloty and the
Russian ruble.
MARKET RISK
We use financial instruments, including fixed and
variable rate debt, to finance operations, for capital
spending programs and for general corporate
purposes. Additionally, financial instruments, including
various derivative contracts, are used to hedge
exposures to interest rate, commodity and foreign
currency risks. We do not use financial instruments for
trading purposes. Information related to International
Paper’s debt obligations is included in Note 13 Debt
and Lines of Credit on pages 66 and 67 of Item 8.
Financial Statements and Supplementary Data. A
discussion of derivatives and hedging activities is
included in Note 14 Derivatives and Hedging Activities
on pages 67 through 71 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 sensitivity
analysis measures the potential loss in earnings, 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,
2015 and 2014 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, 2015 and 2014, the net fair
value liability of financial instruments with exposure to
interest rate risk was approximately $9.3 billion and $9.8
billion, respectively. The potential loss in fair value
resulting from a 10% adverse shift in quoted interest
rates would have been approximately $565 million and
$410 million at December 31, 2015 and 2014,
respectively.
Commodity Price Risk
The objective of our commodity exposure management
is to minimize volatility in earnings due to large
fluctuations in the price of commodities. Commodity
swap or forward purchase contracts may be used to
manage risks associated with market fluctuations in
energy prices. The net fair value of such outstanding
energy hedge contracts at December 31, 2015 and
2014 was approximately a $7 million and a $2 million
liability, respectively. The potential loss in fair value
resulting from a 10% adverse change in the underlying
commodity prices would have been approximately $1
million at December 31, 2015 and 2014, respectively.
Foreign Currency Risk
International Paper transacts business in many
currencies 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 borrowings
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, 2015 and 2014, the net fair value of
financial instruments with exposure to foreign currency
risk was approximately a $4 million and a $1 million
asset, respectively. The potential loss in fair value for
such financial instruments from a 10% adverse change
in quoted foreign currency exchange rates would have
been approximately $30 million and $52 million at
December 31, 2015 and 2014, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See the preceding discussion and Note 14 Derivatives
and Hedging Activities on pages 67 through 71 of
Item 8. Financial Statements and Supplementary Data.