Starbucks 2012 Annual Report Download - page 51

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45
transactions involving various derivative instruments to hedge revenues, inventory purchases, assets, and
liabilities denominated in foreign currencies.
As of September 30, 2012, we had forward foreign exchange contracts that hedge portions of anticipated
international revenue streams and inventory purchases. In addition, we had forward foreign exchange contracts
that qualify as accounting hedges of our net investment in Starbucks Japan to minimize foreign currency exposure.
Starbucks 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
derivatives are generally offset by corresponding decreases or increases in the US dollar value of our foreign
currency denominated payables and receivables (i.e. “hedged items”) that would occur within the period.
The following table summarizes the potential impact as of September 30, 2012 to Starbucks 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):
Increase/(Decrease) to Net Earnings Increase/(Decrease) to OCI
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
Foreign currency hedges $ 8 $ (8) $ 30 $ (30)
Equity Security Price Risk
We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within
our trading portfolio. The trading securities approximate a portion of our liability under the Management Deferred
Compensation Plan (“MDCP”). A corresponding liability is included in accrued compensation and related costs
on the consolidated balance sheets. These investments are recorded at fair value with unrealized gains and losses
recognized in net interest income and other in the consolidated statements of earnings. The offsetting changes in
the MDCP liability are recorded in general and administrative expenses. We performed a sensitivity analysis
based on a 10% change in the underlying equity prices of our investments as of September 30, 2012 and
determined that such a change would not have a significant impact on the fair value of these instruments.
Interest Rate Risk
We utilize short-term and long-term financing and may use interest rate hedges to manage the effect of interest
rate changes on our existing debt as well as the anticipated issuance of new debt. As of September 30, 2012 and
October 2, 2011, we did not have any interest rate hedge agreements outstanding.
The following table summarizes the impact of a change in interest rates as of September 30, 2012 on the fair value
of Starbucks debt (in millions):
Change in Fair Value
Fair Value
100 Basis Point Increase in
Underlying Rate
100 Basis Point Decrease in
Underlying Rate
Debt $ 674 $ 29 $ (29)
Our available-for-sale securities comprise a diversified portfolio consisting mainly of fixed income instruments.
The primary objectives of these investments are to preserve capital and liquidity. Available-for-sale securities are
recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component