filings.toolsItem 7A. Quantitative and Qualitative Disclosures about Market Risk
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates in the various countries in which our products are manufactured and/or sold. For our manufacturing operations, we manage exposures to foreign currency assets and earnings primarily by funding certain foreign currency-denominated assets with liabilities in the same currency so that certain exposures are naturally offset. We primarily use borrowings denominated in euro and British pound sterling for these purposes. In managing our foreign currency transaction exposures, we also enter into foreign currency forward exchange and option contracts. These contracts generally are used to fix the local currency cost of purchased goods or services or selling prices denominated in currencies other than the functional currency. The notional amount of outstanding foreign exchange contracts and foreign currency options was approximately $636 million and $664 million at the end of 2013 and 2012, respectively.
The impact of foreign exchange rate changes for 2013 and 2012 from the prior year for each period is provided below:
| (In millions) | 2013 | 2012 | ||||||
|---|---|---|---|---|---|---|---|---|
| Impact of foreign exchange rates increased (decreased): | ||||||||
| Revenues | $ | 6 | $ | (80 | ) | |||
| Segment profit | (1 | ) | (10 | ) | ||||
Interest Rate Risks
Our financial results are affected by changes in interest rates. As part of managing this risk, we seek to achieve a prudent balance between floating- and fixed-rate exposures. We continually monitor our mix of these exposures and adjust the mix, as necessary. For our Finance group, we limit our risk to changes in interest rates with a strategy of matching floating-rate assets with floating-rate liabilities that includes the use of interest rate exchange agreements.
Quantitative Risk Measures
In the normal course of business, we enter into financial instruments for purposes other than trading. To quantify the market risk inherent in our financial instruments, we utilize a sensitivity analysis. The financial instruments that are subject to market risk (interest rate risk and foreign exchange rate risk) include finance receivables (excluding lease receivables), debt (excluding lease obligations), interest rate exchange agreements and foreign currency exchange contracts.
Presented below is a sensitivity analysis of the fair value of financial instruments outstanding at year-end. We estimate the fair value of the financial instruments using discounted cash flow analysis and indicative market pricing as reported by leading financial news and data providers. This sensitivity analysis is most likely not indicative of actual results in the future. The following table illustrates the sensitivity to a hypothetical change in the fair value of the financial instruments assuming a 10% decrease in interest rates and a 10% strengthening in exchange rates against the U.S. dollar:
| 2013 | 2012 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | Carrying Value* | Fair Value* | Sensitivity of Fair Value to a 10% Change | Carrying Value* | Fair Value* | Sensitivity of Fair Value to a 10% Change | ||||||||||||||
| Manufacturing group | ||||||||||||||||||||
| Foreign exchange rate risk | ||||||||||||||||||||
| Debt | $ | (249 | ) | $ | (275 | ) | $ | (27 | ) | $ | (564 | ) | $ | (598 | ) | $ | (60 | ) | ||
| Foreign currency exchange contracts | (12 | ) | (12 | ) | 33 | 6 | 6 | 34 | ||||||||||||
| $ | (261 | ) | $ | (287 | ) | $ | 6 | $ | (558 | ) | $ | (592 | ) | $ | (26 | ) | ||||
| Interest rate risk | ||||||||||||||||||||
| Debt | $ | (1,854 | ) | $ | (2,027 | ) | $ | (13 | ) | $ | (2,225 | ) | $ | (2,636 | ) | $ | (9 | ) | ||
| Finance group | ||||||||||||||||||||
| Interest rate risk | ||||||||||||||||||||
| Finance receivables | $ | 1,296 | $ | 1,356 | $ | 24 | $ | 1,766 | $ | 1,793 | $ | 36 | ||||||||
| Debt, including intergroup | (1,256 | ) | (1,244 | ) | (4 | ) | (1,687 | ) | (1,678 | ) | (13 | ) | ||||||||
| $ | 40 | $ | 112 | $ | 20 | $ | 79 | $ | 115 | $ | 23 |
* The value represents an asset or (liability).
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