MOT » Topics » Foreign Currency Risk

These excerpts taken from the MOT 10-Q filed May 6, 2009.
Foreign Currency Risk
 
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company’s policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
 
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.
 
At April 4, 2009 and December 31, 2008, the Company had outstanding foreign exchange contracts totaling $2.4 billion and $2.6 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s condensed consolidated statements of operations.
 
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of April 4, 2009 and the corresponding positions as of December 31, 2008:
 
                 
    Notional Amount
    April 4,
  December 31,
Net Buy (Sell) by Currency   2009   2008
 
 
Chinese Renminbi
  $ (566 )   $ (481 )
Euro
    (488 )     (445 )
Brazilian Real
    (407 )     (356 )
British Pound
    255       122  
Japanese Yen
    128       542  
 
 
 
Foreign Currency Risk
 
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company’s policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
 
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.
 
At April 4, 2009 and December 31, 2008, the Company had outstanding foreign exchange contracts totaling $2.4 billion and $2.6 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s condensed consolidated statements of operations.
 
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of April 4, 2009 and the corresponding positions as of December 31, 2008:
 
                 
    Notional Amount  
    April 4,
    December 31,
 
Net Buy (Sell) by Currency   2009     2008  
   
 
Chinese Renminbi
    (566 )   $ (481 )
Euro
    (488 )     (445 )
Brazilian Real
    (407 )     (356 )
British Pound
    255       122  
Japanese Yen
    128       542  
 
 
 
These excerpts taken from the MOT 10-K filed Feb 26, 2009.
Foreign Currency Risk
 
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company’s policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
 
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.
 
At December 31, 2008 and 2007, the Company had net outstanding foreign exchange contracts totaling $2.6 billion and $3.0 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s consolidated statements of operations.
 
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of December 31, 2008 and the corresponding positions as of December 31, 2007:
 
                 
    Notional Amount  
    December 31,
    December 31,
 
Net Buy (Sell) by Currency   2008     2007  
   
 
Chinese Renminbi
  $ (481 )   $ (1,292 )
Euro
    (445 )     (33 )
Brazilian Real
    (356 )     (377 )
Taiwan Dollar
    124       112  
Japanese Yen
    542       384  
 
 
 
The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, the Company does not expect any counterparties, all of whom presently have investment grade credit ratings, to fail to meet their obligations.
 
Foreign exchange financial instruments that are subject to the effects of currency fluctuations, which may affect reported earnings, include derivative financial instruments and other financial instruments which are not denominated in the functional currency of the legal entity holding the instrument. Derivative financial instruments consist primarily of forward contracts and currency options. Other financial instruments, which are not denominated in the functional currency of the legal entity holding the instrument, consist primarily of cash, cash equivalents, Sigma Fund investments and short-term investments, as well as accounts payable and receivable. Accounts payable and receivable are reflected at fair value in the financial statements. The fair value of the foreign exchange financial instruments would hypothetically decrease by $234 million as of December 31, 2008 if the foreign currency rates were to change unfavorably by 10% from current levels. This hypothetical amount is suggestive of the effect on future cash flows under the following conditions: (i) all current payables and receivables that are hedged were not realized, (ii) all hedged commitments and anticipated transactions were not realized or canceled, and (iii) hedges of these amounts were not canceled or offset. The Company does not expect that any of


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these conditions will occur. The Company expects that gains and losses on the derivative financial instruments should offset gains and losses on the assets, liabilities and future transactions being hedged. If the hedged transactions were included in the sensitivity analysis, the hypothetical change in fair value would be immaterial. The foreign exchange financial instruments are held for purposes other than trading.
 
The ineffective portion of changes in the fair value of foreign currency fair value hedge positions for the periods presented were de minimis. These amounts are included in Other within Other income (expense) in the Company’s consolidated statements of operations. The above amounts include the change in the fair value of derivative contracts related to the changes in the difference between the spot price and the forward price. These amounts are excluded from the measure of effectiveness. Expense (income) related to fair value hedges that were discontinued for the years ended December 31, 2008, 2007 and 2006 are included in the amounts noted above.
 
The Company recorded income (expense) of $(2) million, $1 million and $13 million for the years ended December 31, 2008, 2007 and 2006, respectively, representing the ineffective portions of changes in the fair value of cash flow hedge positions. These amounts are included in Other within Other income (expense) in the Company’s consolidated statements of operations. The above amounts include the change in the fair value of derivative contracts related to the changes in the difference between the spot price and the forward price. These amounts are excluded from the measure of effectiveness. Expense (income) related to cash flow hedges that were discontinued for the years ended December 31, 2008, 2007 and 2006 are included in the amounts noted above.
 
During the years ended December 31, 2008, 2007 and 2006, on a pre-tax basis, income (expense) of $3 million, $(16) million and $(98) million, respectively, was reclassified from equity to earnings in the Company’s consolidated statements of operations.
 
At December 31, 2008, the maximum term of derivative instruments that hedge forecasted transactions was one year. The weighted average duration of the Company’s derivative instruments that hedge forecasted transactions was seven months.
 
Foreign
Currency Risk



 



The Company uses financial instruments to reduce its overall
exposure to the effects of currency fluctuations on cash flows.
The Company’s policy prohibits speculation in financial
instruments for profit on the exchange rate price fluctuation,
trading in currencies for which there are no underlying
exposures, or entering into transactions for any currency to
intentionally increase the underlying exposure. Instruments that
are designated as part of a hedging relationship must be
effective at reducing the risk associated with the exposure
being hedged and are designated as part of a hedging
relationship at the inception of the contract. Accordingly,
changes in market values of hedge instruments must be highly
correlated with changes in market values of underlying hedged
items both at the inception of the hedge and over the life of
the hedge contract.


 



The Company’s strategy related to foreign exchange exposure
management is to offset the gains or losses on the financial
instruments against losses or gains on the underlying
operational cash flows or investments based on the operating
business units’ assessment of risk. The Company enters into
derivative contracts for some of the Company’s
non-functional currency receivables and payables, which are
primarily denominated in major currencies that can be traded on
open markets. The Company uses forward contracts and options to
hedge these currency exposures. In addition, the Company enters
into derivative contracts for some firm commitments and some
forecasted transactions, which are designated as part of a
hedging relationship if it is determined that the transaction
qualifies for hedge accounting under the provisions of
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” A portion of the
Company’s exposure is from currencies that are not traded
in liquid markets and these are addressed, to the extent
reasonably possible, by managing net asset positions, product
pricing and component sourcing.


 



At December 31, 2008 and 2007, the Company had net
outstanding foreign exchange contracts totaling
$2.6 billion and $3.0 billion, respectively.
Management believes that these financial instruments should not
subject the Company to undue risk due to foreign exchange
movements because gains and losses on these contracts should
generally offset losses and gains on the underlying assets,
liabilities and transactions, except for the ineffective portion
of the instruments, which are charged to Other within Other
income (expense) in the Company’s consolidated statements
of operations.


 



The following table shows the five largest net notional amounts
of the positions to buy or sell foreign currency as of
December 31, 2008 and the corresponding positions as of
December 31, 2007:


 












































































































                 

 

 

Notional Amount

 

 

 

December 31,



 

 

December 31,



 

Net Buy (Sell) by
Currency


 

2008

 

 

2007

 

 

 
 


Chinese Renminbi


 

$

(481

)

 

$

(1,292

)


Euro


 

 

(445

)

 

 

(33

)


Brazilian Real


 

 

(356

)

 

 

(377

)


Taiwan Dollar


 

 

124

 

 

 

112

 


Japanese Yen


 

 

542

 

 

 

384

 

 

 






 



The Company is exposed to credit-related losses if
counterparties to financial instruments fail to perform their
obligations. However, the Company does not expect any
counterparties, all of whom presently have investment grade
credit ratings, to fail to meet their obligations.


 



Foreign exchange financial instruments that are subject to the
effects of currency fluctuations, which may affect reported
earnings, include derivative financial instruments and other
financial instruments which are not denominated in the
functional currency of the legal entity holding the instrument.
Derivative financial instruments consist primarily of forward
contracts and currency options. Other financial instruments,
which are not denominated in the functional currency of the
legal entity holding the instrument, consist primarily of cash,
cash equivalents, Sigma Fund investments and short-term
investments, as well as accounts payable and receivable.
Accounts payable and receivable are reflected at fair value in
the financial statements. The fair value of the foreign exchange
financial instruments would hypothetically decrease by
$234 million as of December 31, 2008 if the foreign
currency rates were to change unfavorably by 10% from current
levels. This hypothetical amount is suggestive of the effect on
future cash flows under the following conditions: (i) all
current payables and receivables that are hedged were not
realized, (ii) all hedged commitments and anticipated
transactions were not realized or canceled, and
(iii) hedges of these amounts were not canceled or offset.
The Company does not expect that any of








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79




these conditions will occur. The Company expects that gains and
losses on the derivative financial instruments should offset
gains and losses on the assets, liabilities and future
transactions being hedged. If the hedged transactions were
included in the sensitivity analysis, the hypothetical change in
fair value would be immaterial. The foreign exchange financial
instruments are held for purposes other than trading.


 



The ineffective portion of changes in the fair value of foreign
currency fair value hedge positions for the periods presented
were de minimis. These amounts are included in Other within
Other income (expense) in the Company’s consolidated
statements of operations. The above amounts include the change
in the fair value of derivative contracts related to the changes
in the difference between the spot price and the forward price.
These amounts are excluded from the measure of effectiveness.
Expense (income) related to fair value hedges that were
discontinued for the years ended December 31, 2008, 2007
and 2006 are included in the amounts noted above.


 



The Company recorded income (expense) of $(2) million,
$1 million and $13 million for the years ended
December 31, 2008, 2007 and 2006, respectively,
representing the ineffective portions of changes in the fair
value of cash flow hedge positions. These amounts are included
in Other within Other income (expense) in the Company’s
consolidated statements of operations. The above amounts include
the change in the fair value of derivative contracts related to
the changes in the difference between the spot price and the
forward price. These amounts are excluded from the measure of
effectiveness. Expense (income) related to cash flow hedges that
were discontinued for the years ended December 31, 2008,
2007 and 2006 are included in the amounts noted above.


 



During the years ended December 31, 2008, 2007 and 2006, on
a pre-tax basis, income (expense) of $3 million,
$(16) million and $(98) million, respectively, was
reclassified from equity to earnings in the Company’s
consolidated statements of operations.


 



At December 31, 2008, the maximum term of derivative
instruments that hedge forecasted transactions was one year. The
weighted average duration of the Company’s derivative
instruments that hedge forecasted transactions was seven months.


 




Foreign Currency Risk
 
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company’s policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
 
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.
 
At December 31, 2008 and 2007, the Company had net outstanding foreign exchange contracts totaling $2.6 billion and $3.0 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s consolidated statements of operations.
 
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of December 31, 2008 and the corresponding positions as of December 31, 2007:
 
                 
    Notional Amount  
    December 31,
    December 31,
 
Net Buy (Sell) by Currency   2008     2007  
   
 
Chinese Renminbi
  $ (481 )   $ (1,292 )
Euro
    (445 )     (33 )
Brazilian Real
    (356 )     (377 )
Taiwan Dollar
    124       112  
Japanese Yen
    542       384  
 
 
 
The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, the Company does not expect any counterparties, all of whom presently have investment grade credit ratings, to fail to meet their obligations.
 
The ineffective portion of changes in the fair value of foreign currency fair value hedge positions for the periods presented were de minimis. These amounts are included in Other within Other income (expense) in the Company’s consolidated statements of operations. The above amounts include the change in the fair value of derivative contracts related to the changes in the difference between the spot price and the forward price. These amounts are excluded from the measure of effectiveness. Expense (income) related to fair value hedges that were discontinued for the years ended December 31, 2008, 2007 and 2006 are included in the amounts noted above.
 
The Company recorded income (expense) of $(2) million, $1 million and $13 million for the years ended December 31, 2008, 2007 and 2006, respectively, representing the ineffective portions of changes in the fair value of cash flow hedge positions. These amounts are included in Other within Other income (expense) in the Company’s consolidated statements of operations. The above amounts include the change in the fair value of


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derivative contracts related to the changes in the difference between the spot price and the forward price. These amounts are excluded from the measure of effectiveness. Expense (income) related to cash flow hedges that were discontinued for the years ended December 31, 2008, 2007 and 2006 are included in the amounts noted above.
 
During the years ended December 31, 2008, 2007 and 2006, on a pre-tax basis, income (expense) of $3 million, $(16) million and $(98) million, respectively, was reclassified from equity to earnings in the Company’s consolidated statements of operations.
 
At December 31, 2008, the maximum term of derivative instruments that hedge forecasted transactions was one year. The weighted average duration of the Company’s derivative instruments that hedge forecasted transactions was seven months.
 
Foreign
Currency Risk



 



The Company uses financial instruments to reduce its overall
exposure to the effects of currency fluctuations on cash flows.
The Company’s policy prohibits speculation in financial
instruments for profit on the exchange rate price fluctuation,
trading in currencies for which there are no underlying
exposures, or entering into transactions for any currency to
intentionally increase the underlying exposure. Instruments that
are designated as part of a hedging relationship must be
effective at reducing the risk associated with the exposure
being hedged and are designated as part of a hedging
relationship at the inception of the contract. Accordingly,
changes in market values of hedge instruments must be highly
correlated with changes in market values of underlying hedged
items both at the inception of the hedge and over the life of
the hedge contract.


 



The Company’s strategy related to foreign exchange exposure
management is to offset the gains or losses on the financial
instruments against losses or gains on the underlying
operational cash flows or investments based on the operating
business units’ assessment of risk. The Company enters into
derivative contracts for some of the Company’s
non-functional currency receivables and payables, which are
primarily denominated in major currencies that can be traded on
open markets. The Company uses forward contracts and options to
hedge these currency exposures. In addition, the Company enters
into derivative contracts for some firm commitments and some
forecasted transactions, which are designated as part of a
hedging relationship if it is determined that the transaction
qualifies for hedge accounting under the provisions of
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” A portion of the
Company’s exposure is from currencies that are not traded
in liquid markets and these are addressed, to the extent
reasonably possible, by managing net asset positions, product
pricing and component sourcing.


 



At December 31, 2008 and 2007, the Company had net
outstanding foreign exchange contracts totaling
$2.6 billion and $3.0 billion, respectively.
Management believes that these financial instruments should not
subject the Company to undue risk due to foreign exchange
movements because gains and losses on these contracts should
generally offset losses and gains on the underlying assets,
liabilities and transactions, except for the ineffective portion
of the instruments, which are charged to Other within Other
income (expense) in the Company’s consolidated statements
of operations.


 



The following table shows the five largest net notional amounts
of the positions to buy or sell foreign currency as of
December 31, 2008 and the corresponding positions as of
December 31, 2007:


 












































































































                 

 

 

Notional Amount

 

 

 

December 31,



 

 

December 31,



 

Net Buy (Sell) by
Currency


 

2008

 

 

2007

 

 

 
 


Chinese Renminbi


 

$

(481

)

 

$

(1,292

)


Euro


 

 

(445

)

 

 

(33

)


Brazilian Real


 

 

(356

)

 

 

(377

)


Taiwan Dollar


 

 

124

 

 

 

112

 


Japanese Yen


 

 

542

 

 

 

384

 

 

 






 



The Company is exposed to credit-related losses if
counterparties to financial instruments fail to perform their
obligations. However, the Company does not expect any
counterparties, all of whom presently have investment grade
credit ratings, to fail to meet their obligations.


 



The ineffective portion of changes in the fair value of foreign
currency fair value hedge positions for the periods presented
were de minimis. These amounts are included in Other within
Other income (expense) in the Company’s consolidated
statements of operations. The above amounts include the change
in the fair value of derivative contracts related to the changes
in the difference between the spot price and the forward price.
These amounts are excluded from the measure of effectiveness.
Expense (income) related to fair value hedges that were
discontinued for the years ended December 31, 2008, 2007
and 2006 are included in the amounts noted above.


 



The Company recorded income (expense) of $(2) million,
$1 million and $13 million for the years ended
December 31, 2008, 2007 and 2006, respectively,
representing the ineffective portions of changes in the fair
value of cash flow hedge positions. These amounts are included
in Other within Other income (expense) in the Company’s
consolidated statements of operations. The above amounts include
the change in the fair value of








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101




derivative contracts related to the changes in the difference
between the spot price and the forward price. These amounts are
excluded from the measure of effectiveness. Expense (income)
related to cash flow hedges that were discontinued for the years
ended December 31, 2008, 2007 and 2006 are included in the
amounts noted above.


 



During the years ended December 31, 2008, 2007 and 2006, on
a pre-tax basis, income (expense) of $3 million,
$(16) million and $(98) million, respectively, was
reclassified from equity to earnings in the Company’s
consolidated statements of operations.


 



At December 31, 2008, the maximum term of derivative
instruments that hedge forecasted transactions was one year. The
weighted average duration of the Company’s derivative
instruments that hedge forecasted transactions was seven months.


 




This excerpt taken from the MOT 10-Q filed Oct 30, 2008.
Foreign Currency Risk
 
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company’s policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as a part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
 
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, through managing net asset positions, product pricing and component sourcing.
 
At September 27, 2008 and December 31, 2007, the Company had net outstanding foreign exchange contracts totaling $2.9 billion and $3.0 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s condensed consolidated statements of operations.
 
The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of September 27, 2008 and the corresponding positions as of December 31, 2007:
 
                 
    Notional Amount  
    September 27,
    December 31,
 
Net Buy (Sell) by Currency   2008     2007  
   
 
Chinese Renminbi
  $ (874 )   $ (1,292 )
Brazilian Real
    (413 )     (377 )
Euro
    (387 )     (33 )
British Pound
    201       396  
Japanese Yen
    365       384  
 
 
 
The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, the Company does not expect any counterparties, all of whom presently have investment grade credit ratings, to fail to meet their obligations.
 
This excerpt taken from the MOT 10-Q filed Jul 31, 2008.
Foreign Currency Risk
 
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company’s policy prohibits speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as a part of a hedging relationship at the inception of the contract. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.
 
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, through managing net asset positions, product pricing and component sourcing.
 
At June 28, 2008 and December 31, 2007, the Company had net outstanding foreign exchange contracts totaling $2.5 billion and $3.0 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company’s condensed consolidated statements of operations. The following table shows the five largest net foreign exchange contract positions as of June 28, 2008 and the corresponding positions as of December 31, 2007:
 
                 
    June 28,
    December 31,
 
Buy (Sell)   2008     2007  
   
 
Chinese Renminbi
  $ (907 )   $ (1,292 )
Brazilian Real
    (361 )     (377 )
Taiwan Dollar
    154       112  
British Pound
    238       396  
Japanese Yen
    316       384  
 
 
 
The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, the Company does not expect any counterparties, all of whom presently have high investment grade credit ratings, to fail to meet their obligations.
 
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