John Deere 2015 Annual Report Download - page 29

FINANCIAL INSTRUMENT MARKET RISK INFORMATION for similarly rated borrowers. Cash flows for interest rate swaps
are projected and discounted using forward rates from the swap
The company is naturally exposed to various interest rate and yield curve at the repricing dates. The net loss in these financial
foreign currency risks. As a result, the company enters into instruments’ fair values which would be caused by increasing the
derivative transactions to manage certain of these exposures interest rates by 10 percent from the market rates at
that arise in the normal course of business and not for the October 31, 2015 would have been approximately $14 million.
purpose of creating speculative positions or trading. The The net loss from decreasing the interest rates by 10 percent at
company’s financial services operations manage the relationship October 31, 2014 would have been approximately $18 million.
of the types and amounts of their funding sources to their
receivable and lease portfolio in an effort to diminish risk due to Foreign Currency Risk
interest rate and foreign currency fluctuations, while responding In the equipment operations, the company’s practice is to hedge
to favorable financing opportunities. Accordingly, from time to significant currency exposures. Worldwide foreign currency
time, these operations enter into interest rate swap agreements exposures are reviewed quarterly. Based on the equipment
to manage their interest rate exposure. The company also has operations’ anticipated and committed foreign currency cash
foreign currency exposures at some of its foreign and domestic inflows, outflows and hedging policy for the next twelve months,
operations related to buying, selling and financing in currencies the company estimates that a hypothetical 10 percent
other than the functional currencies. The company has entered strengthening of the U.S. dollar relative to other currencies
into agreements related to the management of these foreign through 2016 would decrease the 2016 expected net cash
currency transaction risks. inflows by approximately $32 million. At October 31, 2014, a
hypothetical 10 percent weakening of the U.S. dollar under
Interest Rate Risk similar assumptions and calculations indicated a potential
Quarterly, the company uses a combination of cash flow models approximate $16 million adverse effect on the 2015 net cash
to assess the sensitivity of its financial instruments with interest inflows.
rate exposure to changes in market interest rates. The models
calculate the effect of adjusting interest rates as follows. Cash In the financial services operations, the company’s policy is
flows for financing receivables are discounted at the current to hedge the foreign currency risk if the currency of the
prevailing rate for each receivable portfolio. Cash flows for borrowings does not match the currency of the receivable
marketable securities are primarily discounted at the applicable portfolio. As a result, a hypothetical 10 percent adverse change
benchmark yield curve plus market credit spreads. Cash flows for in the value of the U.S. dollar relative to all other foreign
unsecured borrowings are discounted at the applicable currencies would not have a material effect on the financial
benchmark yield curve plus market credit spreads for similarly services cash flows.
rated borrowers. Cash flows for securitized borrowings are
discounted at the swap yield curve plus a market credit spread
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