NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2011 and 2010 (In thousands of Canadian dollars, except share and per share information) (vii) Share-based payment transactions Stock options Deferred share units 5. FINANCIAL RISK MANAGEMENT Credit risk Liquidity risk Market risk 58 CCL Industries Inc. 2011 Annual Report Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices, will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they are due, by monitoring expected cash flows and ensuring the availability of credit. The financial obligations of the Company include trade and other payables, long-term debts and other long-term items. The contractual maturity of trade payables is six months or less. Long-term debts have varying maturities extending to 2018. 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 amounted to $0.8 million. The Company has established a credit policy under which each new customer is analyzed individually for creditworthiness before the Company’s payment and delivery terms and conditions are offered. The Company’s review includes external ratings, where available, and in some cases bank references. Purchase limits are established for each customer, which represent the maximum open amount without requiring approval from senior management; these limits are reviewed quarterly. Customers that fail to meet the Company’s benchmark creditworthiness may transact with the Company only on a prepayment basis. Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Company has exposure to the following risks from its use of financial instruments: The fair value of a DSU is measured using the average of the high and the low trading prices of the Class B shares for the five trading days immediately preceding the date of issue and is remeasured, using a similar five day average, at the financial statement date. The fair value of employee stock options is measured using the Black-Scholes model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility, weighted average expected life of the instruments, expected dividends, and the risk-free interest rate. Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. GLYPH<129> credit risk GLYPH<129> liquidity risk GLYPH<129> market risk