C) Interest Rate, Foreign Exchange Management and Other Hedges The Company uses derivative financial instruments to hedge interest rate, foreign exchange and aluminum cost risks. The Company does not utilize derivative financial instruments for speculative purposes. As CCL operates internationally and only approximately 4% of its 2011 sales to end-use customers is denominated in Canadian dollars, the Company has exposure to market risks from changes in foreign exchange rates. The Company partially manages these exposures by contracting primarily in Canadian dollars, euros, U.K. pounds and U.S. dollars. Additionally, each subsidiary’s sales and expenses are primarily denominated in its local currency, further minimizing the foreign exchange impact on the operating results. The Company had periodically hedged a portion of its expected U.S. dollar cash inflows derived from sales into the United States from the Canadian operations, principally the Container plant in Penetanguishene, Ontario. The Company has not utilized forward contracts since 2009 and has not entered into any forward hedges for 2012. The Company also has exposure to market risks related to interest rate fluctuations on its debt. To mitigate this risk, the Company maintains a combination of fixed and floating rate debt. The Company uses IRSAs to allocate notional debt between fixed and floating rates since the underlying debt is fixed rate debt with U.S. financial institutions. The Company believes that a balance of fixed and floating rate debt can reduce overall interest expense and is in line with its investment in short-term assets such as working capital, and long-term assets such as property, plant and equipment. In 2003, the Company entered into an IRSA to convert a tranche of fixed rate debt to floating rate debt. This IRSA converted US$42.1 million of fixed rate debt (hedging 50% of the 1997 senior notes) into floating rate debt, based on three-month LIBOR rates. The notional amount of this IRSA decreases by US$4.7 million annually to match the decrease in the principal of the underlying senior notes. The notional value of this IRSA is currently US$4.7 million. As the Company has developed into a global business, its financing strategy has been to leverage and hedge the assets and cash flows of each major country with debt denominated in the local currency. Since the Company has been primarily borrowing from U.S. institutions in U.S. dollars, the hedging of U.S. operations has been achieved. The Company has significantly increased its euro- based assets and, consequently, has used CCIRSAs as a means to convert U.S. dollar debt into euro debt to hedge a portion of its euro-based investment and cash flows. In 2006, the Company entered into two CCIRSAs with a Canadian financial institution, the effect of which was to convert US$60 million of 5.29% fixed rate debt (hedging the five-year 2006 senior notes) into EUR50 million of fixed rate debt at 3.82%. The two CCIRSAs expired when the debt was repaid at maturity in March 2011. Also in 2006, the Company entered into four CCIRSAs with a Canadian financial institution, the effect of which was to convert US$59.1 million of 6.67% and 6.97% fixed rate debt (hedging 1998 senior notes and 50% of the 1997 senior notes) into EUR44.9 million of floating rate debt, based on six-month EURIBOR rates. Two of the swaps, converting US$31.0 million into EUR23.6 million, matured in 2010. The notional amount of the euro leg of one of the other CCIRSAs decreases by EUR3.6 million annually, with the U.S. dollar-denominated leg of the other remaining CCIRSA decreasing by US$4.7 million annually to match the decrease in the principal of the underlying senior notes. Currently the two remaining swaps convert US$4.7 million into EUR3.6 million. The effect of interest earned on these swap agreements was to reduce gross interest expense by $0.7 million in 2011, compared to a reduction of $2.3 million in 2010. The unrealized gain on these contracts was $0.3 million as of December 31, 2011, due primarily to the movement of exchange rates. The only other material hedges the Company is involved in are the aluminum futures contracts discussed in Section 2C: “Container Segment.” The Company is potentially exposed to credit risk arising from derivative financial instruments if a counterparty fails to meet its obligations. These Counterparties are large international financial institutions and, to date, no such counterparty has failed to meet its financial obligations to the Company. As at December 31, 2011, the Company’s exposure to credit risk arising from derivative financial instruments was $0.3 million (2010 – $2.1 million). CCL Industries Inc. 2011 Annual Report 25