Finance-Risk Management

Essay by fishersciUniversity, Master'sA+, March 2004

download word file, 3 pages 3.5

Downloaded 339 times

As a company that operates their business internationally, Boeing interacts with customers and suppliers whose home currencies may not be U.S dollars. Boeing is exposed to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates, and commodity prices. To help protect against the risks from currency fluctuations, Boeing generally turns to currency hedging. This preserves the exchange rate between two currencies at a know value. Hedging is implemented by entering into "financial instruments such as forward contracts, which allows Boeing to lock into a known future exchange rate at a future date." (Frontiers Focus on Finance, 2003) Without hedging, the values of payments made in the future are subject to currency swings and could possibly end up being worth more or less than forecast. As of January 1, 2003, Boeing accounts for derivatives pursuant to SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended.

This standard requires that all derivative instruments be recognized in the financial statements and measured at their fair value regardless of the purpose or intent for holding them.

For derivatives designated as "hedges of the exposure to changes in the fair value of recognized asset or liability or a firm commitment, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged." (Boeing Annual Report, 2002) Interest rate swaps under which Boeing agrees to pay variable rates of interest are designated as fair value hedges of fixed-rate debt. Boeing also holds forward-starting interest rate swap agreements to fix the cost of funding a firmly committed lease for which payment terms are determined in advance of funding. This hedge relationship mitigates the changes in fair value...