Motorola 2012 Annual Report Download - page 55

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Foreign Currency Risk
We use financial instruments to reduce our overall exposure to the effects of currency fluctuations on cash flows. Our
policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, 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 the market values of hedge instruments must be highly correlated with changes in market values of the underlying
hedged items both at the inception of the hedge and over the life of the hedge contract.
Our 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 our operating assessment of risk. We
enter into derivative contracts for some of our non-functional currency cash, receivables, and payables, which are primarily
denominated in major currencies that can be traded on open markets. We typically use forward contracts and options to hedge
these currency exposures. In addition, we enter into derivative contracts for 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
the authoritative accounting guidance for derivative instruments and hedging activities. A portion of our 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, 2012, we had outstanding foreign exchange contracts totaling $523 million, compared to $524
million outstanding at December 31, 2011. Management believes that these financial instruments should not subject us 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 our 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, 2012 and the corresponding positions as of December 31, 2011:
Notional Amount
Net Buy (Sell) by Currency
December 31,
2012
December 31,
2011
British Pound $ 225 $55
Chinese Renminbi (99)(283)
Norwegian Krone (48)—
Israeli Shekel (35)8
Japanese Yen 32 46
Foreign exchange financial instruments that are subject to the effects of currency fluctuations, which may affect reported
earnings, include derivative financial instruments and other monetary assets and liabilities denominated in a currency other than
the functional currency of the legal entity holding the instrument. Derivative financial instruments consist primarily of currency
forward contracts and options. Other monetary assets and liabilities denominated in a currency other than the functional
currency of the legal entity 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.
Assuming the amounts of the outstanding foreign exchange contracts represent our underlying foreign exchange risk related to
monetary assets and liabilities, a hypothetical unfavorable 10% movement in the foreign exchange rates, from current levels,
would reduce the value of those monetary assets and liabilities by approximately $54 million. Our market risk calculation
represents an estimate of reasonably possible net losses that would be recognized assuming hypothetical 10% movements in
future currency market pricing and is not necessarily indicative of actual results, which may or may not occur. It does not
represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from
those estimated, based upon, among other things, actual fluctuation in market rates, operating exposures, and the timing
thereof. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the
respective underlying derivative financial instruments transactions. The foreign exchange financial instruments are held for
purposes other than trading.
At December 31, 2012, the maximum term of derivative instruments that hedge forecasted transactions was
seven months. The weighted average duration of our derivative instruments that hedge forecasted transactions was three
months.