FO » Topics » Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

These excerpts taken from the FO 10-K filed Feb 27, 2009.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We are exposed to various market risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in interest rates, foreign currency exchange rates and commodity prices. The counterparties are major financial institutions.

Interest Rate Risk

The disclosure about interest rate risk required to be provided under this item is set forth under “Item 7 — Management’s Discussion and Analysis — Liquidity and Capital Resources — Interest Rates” and is incorporated herein by reference.

A hypothetical 100 basis point change in interest rates affecting the Company’s variable rate borrowings would impact pre-tax interest expense by $8.5 million.

Foreign Exchange Rate Risk

We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We periodically enter into forward foreign exchange contracts to hedge a portion of our net investments in foreign subsidiaries.

As indicated in the analysis that follows, the estimated potential loss under foreign exchange contracts from movement in foreign exchange rates would not have a material impact on current results of operations or financial condition. As part of our risk management procedure, we use a value-at-risk (VAR) computation to estimate the potential economic loss that we could incur from adverse changes in foreign exchange rates. The VAR estimations are intended to measure the maximum amount of our loss from foreign exchange contracts due to adverse market movements in foreign exchange rates, given a specified confidence level, over a given period of time. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. Also, the use of the VAR model should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.

 

52


Table of Contents

The following table summarizes our estimated loss under the VAR model as of December 31, 2008 and 2007, respectively. The increase in the VAR results from more foreign exchanges contracts and greater volatility in the foreign exchange markets.

 

       
(In millions)   

Estimated

Amount of Loss

   Period    Confidence
Level

2008 foreign exchange

   $ 7.2    1 day    95%

2007 foreign exchange

   $ 1.6    1 day    95%

The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not exceed the estimated losses shown above. The amounts shown here disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets.

The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.

Commodity Price Risk

We are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. We use derivative contracts to manage our exposure to commodity price volatility. The exposures under these contracts could be material to our financial statements.

 

53


Table of Contents

Item 7A.  Quantitative and Qualitative Disclosures
About Market Risk.

Market Risk

We are exposed to various market
risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in interest rates, foreign currency exchange rates
and commodity prices. The counterparties are major financial institutions.

Interest Rate Risk

FACE="ARIAL" SIZE="2">The disclosure about interest rate risk required to be provided under this item is set forth under “Item 7 — Management’s Discussion and Analysis — Liquidity and Capital Resources —
Interest Rates” and is incorporated herein by reference.

A hypothetical 100 basis point change in interest rates affecting the Company’s
variable rate borrowings would impact pre-tax interest expense by $8.5 million.

Foreign Exchange Rate Risk

STYLE="margin-top:12px;margin-bottom:0px">We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting our risk that would
otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We periodically enter into forward foreign exchange contracts to hedge a portion of our net
investments in foreign subsidiaries.

As indicated in the analysis that follows, the estimated potential loss under foreign exchange contracts from movement in
foreign exchange rates would not have a material impact on current results of operations or financial condition. As part of our risk management procedure, we use a value-at-risk (VAR) computation to estimate the potential economic loss that we could
incur from adverse changes in foreign exchange rates. The VAR estimations are intended to measure the maximum amount of our loss from foreign exchange contracts due to adverse market movements in foreign exchange rates, given a specified confidence
level, over a given period of time. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques.
Also, the use of the VAR model should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.

 


52







Table of Contents


The following table summarizes our estimated loss under the VAR model as of December 31, 2008 and 2007, respectively. The
increase in the VAR results from more foreign exchanges contracts and greater volatility in the foreign exchange markets.

 












































    
(In millions)  

Estimated

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="right">Amount of Loss

  Period  Confidence
Level

2008 foreign exchange

  $7.2  1 day  95%

2007 foreign exchange

  $1.6  1 day  95%

The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not
exceed the estimated losses shown above. The amounts shown here disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These
amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets.

SIZE="2">The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.

STYLE="margin-top:12px;margin-bottom:0px">Commodity Price Risk

We are subject to price volatility caused by weather, supply
conditions, geopolitical and economic variables, and other unpredictable external factors. We use derivative contracts to manage our exposure to commodity price volatility. The exposures under these contracts could be material to our financial
statements.

 


53







Table of Contents


Item 7A.  Quantitative and Qualitative Disclosures
About Market Risk.

Market Risk

We are exposed to various market
risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in interest rates, foreign currency exchange rates
and commodity prices. The counterparties are major financial institutions.

Interest Rate Risk

FACE="ARIAL" SIZE="2">The disclosure about interest rate risk required to be provided under this item is set forth under “Item 7 — Management’s Discussion and Analysis — Liquidity and Capital Resources —
Interest Rates” and is incorporated herein by reference.

A hypothetical 100 basis point change in interest rates affecting the Company’s
variable rate borrowings would impact pre-tax interest expense by $8.5 million.

Foreign Exchange Rate Risk

STYLE="margin-top:12px;margin-bottom:0px">We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting our risk that would
otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We periodically enter into forward foreign exchange contracts to hedge a portion of our net
investments in foreign subsidiaries.

As indicated in the analysis that follows, the estimated potential loss under foreign exchange contracts from movement in
foreign exchange rates would not have a material impact on current results of operations or financial condition. As part of our risk management procedure, we use a value-at-risk (VAR) computation to estimate the potential economic loss that we could
incur from adverse changes in foreign exchange rates. The VAR estimations are intended to measure the maximum amount of our loss from foreign exchange contracts due to adverse market movements in foreign exchange rates, given a specified confidence
level, over a given period of time. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques.
Also, the use of the VAR model should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.

 


52







Table of Contents


The following table summarizes our estimated loss under the VAR model as of December 31, 2008 and 2007, respectively. The
increase in the VAR results from more foreign exchanges contracts and greater volatility in the foreign exchange markets.

 












































    
(In millions)  

Estimated

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="right">Amount of Loss

  Period  Confidence
Level

2008 foreign exchange

  $7.2  1 day  95%

2007 foreign exchange

  $1.6  1 day  95%

The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not
exceed the estimated losses shown above. The amounts shown here disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These
amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets.

SIZE="2">The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.

STYLE="margin-top:12px;margin-bottom:0px">Commodity Price Risk

We are subject to price volatility caused by weather, supply
conditions, geopolitical and economic variables, and other unpredictable external factors. We use derivative contracts to manage our exposure to commodity price volatility. The exposures under these contracts could be material to our financial
statements.

 


53







Table of Contents


This excerpt taken from the FO 10-K filed Mar 3, 2008.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We are exposed to various market risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in interest rates, foreign currency exchange rates and commodity prices. The counterparties are major financial institutions.

Interest Rate Risk

The disclosure about interest rate risk required to be provided under this item is set forth under “Item 7 — Management’s Discussion and Analysis — Liquidity and Capital Resources — Interest Rates” and is incorporated herein by reference.

A hypothetical 100 basis point change in interest rates affecting the Company’s variable rate borrowings would not have a material effect on results of operations.

Foreign Exchange Rate Risk

We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We periodically enter into forward foreign exchange contracts to hedge a portion of our net investments in foreign subsidiaries.

As indicated in the analysis that follows, the estimated potential loss under foreign exchange contracts from movement in foreign exchange rates would not have a material impact on current results of operations or financial condition. As part of our risk management procedure, we use a value-at-risk (VAR) computation to estimate the potential economic loss that we could incur from adverse changes in foreign exchange rates. The VAR estimations are intended to measure the maximum amount of our loss from foreign exchange contracts due to adverse market movements in foreign exchange rates, given a specified confidence level, over a given period of time. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. Also, the use of the VAR model should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.

 

47


Table of Contents

The following table summarizes our estimated loss under the VAR model as of December 31, 2007 and 2006, respectively.

 

       
(In millions)   

Estimated

Amount of Loss

   Period   

Confidence

Level

2007 foreign exchange

   $ 1.6    1 day    95%

2006 foreign exchange

   $ 2.7    1 day    95%

The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not exceed the estimated losses shown above. The amounts shown here disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets.

The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.

Commodity Price Risk

We are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. We use derivative contracts to manage our exposure to commodity price volatility. The exposures under these contracts could be material to our financial statements.

 

48


Table of Contents
This excerpt taken from the FO 10-K filed Feb 28, 2008.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We are exposed to various market risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in interest rates, foreign currency exchange rates and commodity prices. The counterparties are major financial institutions.

Interest Rate Risk

The disclosure about interest rate risk required to be provided under this item is set forth under “Item 7 — Management’s Discussion and Analysis — Liquidity and Capital Resources — Interest Rates” and is incorporated herein by reference.

A hypothetical 100 basis point change in interest rates affecting the Company’s variable rate borrowings would not have a material effect on results of operations.

Foreign Exchange Rate Risk

We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We periodically enter into forward foreign exchange contracts to hedge a portion of our net investments in foreign subsidiaries.

As indicated in the analysis that follows, the estimated potential loss under foreign exchange contracts from movement in foreign exchange rates would not have a material impact on current results of operations or financial condition. As part of our risk management procedure, we use a value-at-risk (VAR) computation to estimate the potential economic loss that we could incur from adverse changes in foreign exchange rates. The VAR estimations are intended to measure the maximum amount of our loss from foreign exchange contracts due to adverse market movements in foreign exchange rates, given a specified confidence level, over a given period of time. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. Also, the use of the VAR model should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.

 

47


Table of Contents

The following table summarizes our estimated loss under the VAR model as of December 31, 2007 and 2006, respectively.

 

       
(In millions)   

Estimated

Amount of Loss

   Period   

Confidence

Level

2007 foreign exchange

   $ 1.6    1 day    95%

2006 foreign exchange

   $ 2.7    1 day    95%

The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not exceed the estimated losses shown above. The amounts shown here disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets.

The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.

Commodity Price Risk

We are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. We use derivative contracts to manage our exposure to commodity price volatility. The exposures under these contracts could be material to our financial statements.

 

48


Table of Contents
This excerpt taken from the FO 10-Q filed Aug 8, 2007.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There are no material changes in the information provided in Item 7A-Quantitative and Qualitative Disclosures about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

This excerpt taken from the FO 10-Q filed May 9, 2007.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There are no material changes in the information provided in Item 7A-Quantitative and Qualitative Disclosures about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

This excerpt taken from the FO 10-Q filed Nov 8, 2006.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There are no material changes in the information provided in Item 7A-Quantitative and Qualitative Disclosure about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

This excerpt taken from the FO 10-Q filed Aug 8, 2006.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There are no material changes in the information provided in Item 7A-Quantitative and Qualitative Disclosure about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

This excerpt taken from the FO 10-Q filed May 9, 2006.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There are no material changes in the information provided in Item 7A-Quantitative and Qualitative Disclosure about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

This excerpt taken from the FO 10-K filed Mar 9, 2006.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Market Risk

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in foreign currency exchange rates and interest rates. The counterparties are major financial institutions.

Interest Rate Risk

The disclosure about interest rate risk required to be provided under this item is set forth under “Item 7 — Management’s Discussion and Analysis — Liquidity and Capital Resources — Interest Rates” and is incorporated herein by reference.

A hypothetical 20 basis point change in interest rates affecting the Company’s variable rate borrowings would not have a material effect on results of operations.

Foreign Exchange Risk

We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We periodically enter into forward foreign exchange contracts to hedge a portion of our net investments in foreign subsidiaries.

As indicated in the analysis that follows, the estimated potential loss under foreign exchange contracts from movement in foreign exchange rates would not have a material impact on current results of operations or financial condition. As part of our risk management procedure, we use a value-at-risk (VAR) computation to estimate the potential economic loss that we could incur from adverse changes in foreign exchange rates. The VAR estimations are intended to measure the maximum amount of our loss from adverse market movements in foreign exchange rates, given a specified confidence level, over a given period of time. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. The estimated fair value loss shown in the table below does not have a material impact on current results of operations or financial condition. Also, the use of the VAR model should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.

The following table summarizes our estimated loss under the VAR model as of December 31, 2005 and 2004, respectively.

 

       

(In millions)

   Estimated  
Amount of Loss  
   Period      Confidence
Level

2005 foreign exchange

   $1.4      1 day      95%

2004 foreign exchange

   $2.7      1 day      95%

The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not exceed the estimated losses shown above. The amounts shown here disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets.

The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. At December 31, 2005 and 2004, the fair value of all outstanding contracts and the book value of the contracts were essentially the same.

Commodities

We are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. We use derivative contracts to manage our exposure to commodity price volatility. The exposures under these contracts are not considered material to our financial statements.

 

38


Table of Contents
This excerpt taken from the FO 10-Q filed Feb 17, 2006.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company is exposed to market risk associated with foreign currency fluctuations, interest rate changes and commodity prices. To manage the volatility of these risks, from time to time, the Company enters into financial instruments to reduce its risks. We do not enter into financial instruments for trading or speculative purposes. The principal financial instruments used are forward foreign exchange contracts and interest rate swaps, as described in Note 15, “Financial Instruments,” to the Consolidated Financial Statements in the Annual Report on Form 10-K/A for the year ended December 31, 2004.

 

In the second quarter of 2005, the Company entered into treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of debt associated with the spirits and wine acquired businesses. We are accounting for these hedges as a cash flow hedge, as the treasury rate locks hedge against the variability of interest payments on future issuance of debt.

 

Upon announcement of the spirits and wine acquisition on April 21, 2005, we began to hedge foreign currency exposures associated with the acquisition cost in order to mitigate the currency exposure. As of the closing on July 26, 2005, we fully hedged all British pound foreign currency exposures with respect to the acquisition cost paid at the closing. The acquisition hedges consisted of call options and forward contracts denominated in British pounds.

 

For additional information on these acquisition-related transactions (treasury rate locks, call options and forward contracts), refer to Note 14, “Financial Instruments,” to the condensed consolidated financial statements.

 

53


This excerpt taken from the FO 10-Q filed Feb 17, 2006.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There are no material changes in the information provided in Item 7A of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.

 

This excerpt taken from the FO 10-Q filed Nov 8, 2005.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company is exposed to market risk associated with foreign currency fluctuations, interest rate changes and commodity prices. To manage the volatility of these risks, from time to time, the Company enters into financial instruments to reduce its risks. We do not enter into financial instruments for trading or speculative purposes. The principal financial instruments used are forward foreign exchange contracts and interest rate swaps, as described in Note 14, “Financial Instruments,” to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2004.

 

In the second quarter of 2005, the Company entered into treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of debt associated with the spirits and wine acquired businesses. We are accounting for these hedges as a cash flow hedge, as the treasury rate locks hedge against the variability of interest payments on future issuance of debt.

 

Upon announcement of the spirits and wine acquisition on April 21, 2005, we began to hedge foreign currency exposures associated with the acquisition cost in order to mitigate the currency exposure. As of the closing on July 26, 2005, we fully hedged all British pound foreign currency exposures with respect to the acquisition cost paid at the closing. The acquisition hedges consisted of call options and forward contracts denominated in British pounds.

 

For additional information on these acquisition-related transactions (treasury rate locks, call options and forward contracts), refer to Note 13, “Financial Instruments,” to the condensed consolidated financial statements.

 

51


This excerpt taken from the FO 10-Q filed Aug 9, 2005.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company is exposed to market risk associated with foreign currency fluctuations, interest rate changes and commodity prices. To manage the volatility of these risks, from time to time, the Company enters into financial instruments to reduce its risks. We do not enter into financial instruments for trading or speculative purposes. The principal financial instruments used are forward foreign exchange contracts and interest rate swaps, as described in Note 14, “Financial Instruments,” to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2004.

 

In the second quarter of 2005, the Company entered into treasury rate locks to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of debt associated with the acquisition of several spirits and wine brands and distribution assets from Pernod Ricard. We are accounting for these hedges as a cash flow hedge, as the treasury rate locks hedge against the variability of interest payments on future issuance of debt.

 

Upon announcement of the acquisition of several spirits and wine brands and distribution assets from Pernod Ricard on April 21, 2005, we began to hedge foreign currency exposures associated with the acquisition cost. As of the closing on July 26, we fully hedged all British pound foreign currency exposures with respect to the acquisition cost paid at the closing. The net acquisition hedges consisted of call options and forward contracts denominated in British pounds entered into in order to mitigate the currency exposure related to the acquisition of spirits and wine brands and distribution assets from Pernod Ricard.

 

For additional information on these acquisition-related transactions (treasury rate locks, call options and forward contracts), refer to Note 11, “Financial Instruments,” to the condensed consolidated financial statements.

 

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