Starbucks 2008 Annual Report Download - page 44

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FINANCIAL RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates,
equity prices, and interest rates. The Company manages its exposure to various market-based risks according to an
umbrella risk management policy. Under this policy, market-based risks are quantified and evaluated for potential
mitigation strategies, such as entering into hedging transactions. The umbrella risk management policy governs the
hedging instruments the business may use and limits the dollar risk to net earnings. The Company also monitors and
limits the amount of associated counterparty credit risk. Additionally, this policy restricts, among other things, the
amount of market-based risk the Company will tolerate before implementing approved hedging strategies and
prohibits speculative trading activity. In general, hedge instruments do not have maturities in excess of five years.
The sensitivity analyses performed below provide only a limited, point-in-time view of the market risk of the
financial instruments discussed. The actual impact of the respective underlying rates and price changes on the
financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
The Company purchases commodity inputs, including coffee and dairy products that are used in its operations and
are subject to price fluctuations that impact its financial results. In addition to fixed-priced contracts and price-to-
be-fixed contracts for coffee purchases, the Company may enter into commodity hedges to manage commodity
price risk using financial derivative instruments. The Company performed a sensitivity analysis based on a 10%
change in the underlying commodity prices of its commodity hedges, as of the end of fiscal 2008, and determined
that such a change would not have a significant effect on the fair value of these instruments.
Foreign Currency Exchange Risk
The majority of the Company’s revenue, expense and capital purchasing activities are transacted in US dollars.
However, because a portion of the Company’s operations consists of activities outside of the United States, the
Company has transactions in other currencies, primarily the Canadian dollar, British pound sterling, euro, and
Japanese yen. As a result, Starbucks may engage in transactions involving various derivative instruments to hedge
revenues, inventory purchases, assets, and liabilities denominated in foreign currencies.
As of September 28, 2008, the Company had forward foreign exchange contracts that hedge portions of anticipated
international revenue streams and inventory purchases. In addition, Starbucks had forward foreign exchange
contracts that qualify as accounting hedges of its net investment in Starbucks Japan, as well as the Company’s net
investments in its Canada, UK, and China subsidiaries, to minimize foreign currency exposure.
The Company also had forward foreign exchange contracts that are not designated as hedging instruments for
accounting purposes (free standing derivatives), but which largely offset the financial impact of translating certain
foreign currency denominated payables and receivables. Increases or decreases in the fair value of these hedges are
generally offset by corresponding decreases or increases in the US dollar value of the Company’s foreign currency
denominated payables and receivables (i.e. “hedged items”) that would occur within the hedging period.
The following table summarizes the potential impact to the Company’s future net earnings and other comprehensive
income (“OCI”) from changes in the fair value of these derivative financial instruments due in turn to a change in the
value of the US dollar as compared to the level of foreign exchange rates. The information provided below relates
only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items
(in millions):
September 28, 2008
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
Increase/(Decrease) to Net Earnings Increase/(Decrease) to OCI
Foreign currency hedges............. $68 (56) 15 (19)
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