Corning 2007 Annual Report

Quantitative and Qualitative Disclosures About Market Risks
We operate and conduct business in many foreign countries and as a result are exposed to movements in foreign currency exchange
rates. Our exposure to exchange rates have the following effects:
• exchange rate movements on financial instruments and transactions denominated in foreign currencies which impact earnings, and
• exchange rate movements upon conversion of net assets and net income of foreign subsidiaries for which the functional currency
is not the U.S. dollar, which impact our net equity.
Our most significant foreign currency exposure is the Japanese yen and to a much lesser extent the Korean won, the Taiwan dollar,
and the Euro. We selectively enter into foreign exchange forward and option contracts with durations generally 18 months or less to
hedge our exposure to exchange rate risk on foreign source income and purchases. These hedges are scheduled to mature coincident
with the timing of the underlying foreign currency commitments and transactions. The objective of these contracts is to neutralize the
impact of exchange rate movements on our operating results. We also enter into foreign exchange forward contracts when situations
arise where our foreign subsidiaries or Corning enter into lending situations, generally on an intercompany basis, denominated in
currencies other than their local currency. We do not hold or issue derivative financial instruments for trading purposes. Corning uses
derivative instruments (forwards) to limit the exposure to foreign currency fluctuations associated with certain monetary assets and
liabilities. These derivative instruments are not designated as hedging instruments for accounting purposes and, as such, are referred
to as undesignated hedges. Changes in the fair value of undesignated hedges, along with foreign currency gains and losses arising
from the underlying monetary assets or liabilities, are recorded in current period earnings in the other income, net component in the
consolidated statement of operations.
Equity in earnings of affiliated companies has historically contributed a significant amount to our income from continuing operations.
Equity in earnings of affiliated companies, net of impairments was $942 million in 2007 and $960 million in 2006 with foreign-based
affiliates comprising over 63% of this amount in 2007. Equity earnings from Samsung Corning and Samsung Corning Precision
totaled $532 million for 2007 and $555 million for 2006. Exchange rate fluctuations and actions taken by management of these
entities can affect the earnings of these companies.
We use a sensitivity analysis to assess the market risk associated with our foreign currency exchange risk. Market risk is defined as
the potential change in fair value of assets and liabilities resulting from an adverse movement in foreign currency exchange rates. At
December 31, 2007, we had open forward contracts, and foreign denominated debt with values exposed to exchange rate movements,
all of which were designated as hedges at December 31, 2007. A 10% adverse movement in quoted foreign currency exchange rates
could result in a loss in fair value of these instruments of $239 million. Specific to the Japanese yen, a 10% adverse movement in
quoted yen exchange rates could result in a loss in fair value of these instruments of $146 million.
As we derive approximately 70% of our net sales from outside the U.S., our sales and net income could be affected if the U.S. dollar
significantly strengthens or weakens against foreign currencies, most notably the Japanese yen and Euro. Our outlooks included in
Management’s Discussion and Analysis assume exchange rates during 2008 remain constant at January 2008 levels. A plus or minus
10 point movement in the U.S. dollar - Japanese yen exchange rate would result in a change to 2008 net sales of approximately $239
million and net income of approximately $220 million. A plus or minus 10 point movement in the U.S. dollar - Euro exchange rate
would result in a change to 2008 net sales of approximately $61 million and net income of approximately $12 million.
Interest Rate Risk Management
It is our policy to conservatively manage our exposure to changes in interest rates. At December 31, 2007, our consolidated debt
portfolio contained less than 34% of variable rate instruments.
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