Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Linde is exposed to market risks relating to fluctuations in interest rates and currency exchange rates. The objective of financial risk management at Linde is to minimize the negative impact of interest rate and foreign exchange rate fluctuations on the company’s earnings, cash flows and equity.

To manage these risks, Linde uses various derivative financial instruments, including interest-rate swaps, treasury rate locks, currency swaps, forward contracts, and commodity contracts. Linde only uses commonly traded and non-leveraged instruments. These contracts are entered into primarily with major banking institutions thereby minimizing the risk of credit loss. Also, see Notes 2 and 14 to the consolidated financial statements for a more complete description of Linde’s accounting policies and use of such instruments.

The following discussion presents the sensitivity of the market value, earnings and cash flows of Linde’s financial instruments to hypothetical changes in interest and exchange rates assuming these changes occurred at December 31, 2018. The range of changes chosen for these discussions reflects Linde’s view of changes which are reasonably possible over a one-year period. Market values represent the present values of projected future cash flows based on interest rate and exchange rate assumptions.

Interest Rate Risk

At December 31, 2018, Linde had debt totaling $15,296 million ($9,000 million at December 31, 2017). For fixed-rate instruments, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for floating-rate instruments, interest rate changes generally do not affect the fair market value of the instrument but impact future earnings and cash flows, assuming that other factors are held constant. At December 31, 2018, including the impact of derivatives Linde had fixed-rate debt of $12,565 million and floating-rate debt of $2,731 million, representing 82% and 18%, respectively, of total debt. At December 31, 2017, Linde had fixed-rate debt of $8,253 million and floating-rate debt of $747 million, representing 92% and 8%, respectively, of total debt.

Fixed Rate Debt

In order to mitigate interest rate risk, when considered appropriate interest-rate swaps are entered into as hedges of underlying financial instruments to effectively change the characteristics of the interest rate without actually changing the underlying financial instrument. At December 31, 2018, Linde had fixed-to-floating interest rate swaps outstanding that were designated as hedging instruments of the underlying debt issuances - refer to Note 14 to the consolidated financial statements for additional information. This sensitivity analysis assumes that, holding all other variables constant (such as foreign exchange rates, swaps and debt levels), a one-percentage-point increase in interest rates would decrease the unrealized fair market value of the fixed-rate debt portfolio by approximately $594 million ($450 million in 2017). A 100 basis point increase in interest rates would result in an approximate $92 million increase to derivative assets recorded.

Variable Rate Debt

At December 31, 2018, the after-tax earnings and cash flows impact of a one-percentage point increase in interest rates, including the offsetting impact of derivatives, on the variable-rate debt portfolio would be approximately $24 million. At December 31, 2017 the impact of a one-percentage point increase was $6 million, holding all other variables constant.

Foreign Currency Risk

Linde’s exchange-rate exposures result primarily from its investments and ongoing operations in South America (primarily Brazil, Argentina, Chile and Colombia), Europe (primarily Germany, Scandinavia, and the United Kingdom), Canada, Mexico, Asia Pacific (primarily Australia, China, India, and Korea) and other business transactions such as the procurement of equipment from foreign sources. Linde frequently utilizes currency contracts to hedge these exposures. At December 31, 2018, Linde had a notional amount outstanding of $9,412 million ($2,693 million at December 31, 2017) related to foreign exchange contracts. The majority of these were to hedge recorded balance sheet exposures, primarily intercompany loans denominated in non-functional currencies. See Note 14 to the consolidated financial statements.

Holding all other variables constant, if there were a 10% adverse change in foreign-currency exchange rates for the portfolio, the fair market value of foreign-currency contracts outstanding at December 31, 2018 and 2017 would decrease by approximately $307 million and $174 million, respectively, which would be largely offset by an offsetting gain on the foreign-currency fluctuation of the underlying exposure being hedged.