Office Depot 2012 Annual Report Download - page 43

MARKET SENSITIVE RISKS AND POSITIONS
We have adopted an enterprise risk management process patterned after the principles set out by the Committee of Sponsoring
Organizations (COSO) in 2004. Management utilizes a common view of exposure identification and risk management. A process is in
place for periodic risk reviews and identification of appropriate mitigation strategies.
We have market risk exposure related to interest rates, foreign currency exchange rates, and commodities. Market risk is measured as
the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign
currency exchange rates over the next year. Interest rate changes on obligations may result from external market factors, as well as
changes in our credit rating. We manage our exposure to market risks at the corporate level. The portfolio of interest-sensitive assets
and liabilities is monitored to provide liquidity necessary to satisfy anticipated short-term needs. Our risk management policies allow
the use of specified financial instruments for hedging purposes only; speculation on interest rates, foreign currency rates, o
r
commodities is not permitted.
I
nterest Rate Risk
We are exposed to the impact of interest rate changes on cash, cash equivalents and debt obligations. The impact on cash and short-
term investments held at December 29, 2012 from a hypothetical 10% decrease in interest rates would be a decrease in interest
income of less than $0.1 million.
Market risk associated with our debt portfolio is summarized below:
The risk sensitivity of fixed rate debt reflects the estimated increase in fair value from a 50 basis point decrease in interest rates,
calculated on a discounted cash flow basis. The sensitivity of variable rate debt reflects the possible increase in interest expense
during the next period from a 50 basis point change in interest rates prevailing at year-end.
Foreign Exchange Rate Risk
We conduct business through entities in various countries outside the United States where their functional currency is not the U.S.
dollar. While we sell directly or indirectly to customers in 59 countries, the principal operations of our International Division are in
countries with Euro, British Pound and Mexican Peso functional currencies. We continue to assess our exposure to foreign currency
fluctuation against the U.S. dollar. As of December 29, 2012, a 10% change in the applicable foreign exchange rates would result in
an increase or decrease in our pretax earnings of approximately $5 million.
Although operations generally are conducted in the relevant local currency, we also are subject to foreign exchange transaction
exposure when our subsidiaries transact business in a currency other than their own functional currency. This exposure arises
primarily from inventory purchases in a foreign currency. At December 29, 2012, there was $27 million of foreign exchange forward
contracts hedging inventory exposures. This amount was the highest amount outstanding at any point during 2012. Also, from time-
to-time, we enter into foreign exchange forward transactions to protect against possible changes in exchange rates related to
scheduled or anticipated cash movements among our operating entities. At December 29, 2012, there were $14 million of foreign
exchange forward contracts to hedge these movements.
41
2012 2011
(In thousands)
Carrying
Value
Fair
Value
Risk
Sensitivity
Carrying
Value
Fair
Value
Risk
Sensitivity
6.25% senior notes $ 149,953 $ 153,750 $474 $ 399,953 $ 381,067 $ 2,86
0
9.75% senior secured notes
$ 250,000 $ 265,938 $ 5,483 $
—
$
—
$
—
Asset based credit facilit
y