3M 2012 Annual Report Download - page 48
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Value At Risk:
The value at risk analysis is performed annually. A Monte Carlo simulation technique was used to test the Company’s
exposure to changes in currency rates, interest rates, and commodity prices and assess the risk of loss or benefit in after-
tax earnings of financial instruments (primarily debt), derivatives and underlying exposures outstanding at December 31,
2012. The model (third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. The
exposure to changes in currency rates model used 18 currencies, interest rates related to four currencies, and commodity
prices related to five commodities. This model does not purport to represent what actually will be experienced by the
Company. This model does not include certain hedge transactions, because the Company believes their inclusion would
not materially impact the results. Foreign exchange rate risk of loss or benefit decreased in 2012, primarily due to
decreases in exposures, which is one of the key drivers in the valuation model. Interest rate volatility remained stable in
2012 because interest rates are currently very low and are projected to remain low, based on forward rates. The following
table summarizes the possible adverse and positive impacts to after-tax earnings related to these exposures.
Adverse impact on after-tax
earnings
Positive impact on after-tax
earnings
(Millions)
2012
2011
2012
2011
Foreign exchange rates
$
(97)
$
(131)
$
105
$
146
Interest rates
(2)
(2)
1
2
Commodity prices
(9)
(10)
7
7
In addition to the possible adverse and positive impacts discussed in the preceding table related to foreign exchange
rates, recent historical information is as follows. 3M estimates that year-on-year currency effects, including hedging
impacts, had the following effects on net income attributable to 3M: full-year 2012 ($103 million decrease) and full-year
2011 ($154 million increase). This estimate includes the effect of translating profits from local currencies into U.S. dollars;
the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and
transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks
and the negative impact of swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative and
other transaction gains and losses had the following effects on net income attributable to 3M: full-year 2012 ($49 million
increase) and full-year 2011 (immaterial impact).
An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one
percent price change would result in a pre-tax cost or savings of approximately $71 million per year. The global energy
exposure is such that a 10 percent price change would result in a pre-tax cost or savings of approximately $42 million per
year.
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