For each derivative contract entered into where we look to obtain special hedge accounting treatment, we for- mally document the relationship between the hedging instrument and hedged item, as well as its risk-manage- ment objective and strategy for undertaking the hedge. This process includes linking all derivatives that are desig- nated as fair-value, cash-flow, or foreign-currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative is not highly effective, then we will be required to discontinue hedge accounting with respect to that derivative prospectively. speculative purposes. At June 30, 2003, we had foreign currency contracts in the form of forward exchange con- tracts and option contracts in the amount of $476.7 million and $57.7 million, respectively. The foreign cur- rencies included in forward exchange contracts (notional value stated in U.S. dollars) are principally the Euro ($114.0 million), Swiss franc ($61.9 million), Japanese yen ($56.0 million), British pound ($49.8 million), Canadian dollar ($37.7 million), South Korean won ($37.6 million) and Australian dollar ($30.6 million). The foreign cur- rencies included in the option contracts (notional value stated in U.S. dollars) are principally the Swiss franc  ($21.9 million), Canadian dollar ($21.0 million) and Euro ($11.7 million). We enter into forward exchange contracts to hedge antic- ipated transactions as well as receivables and payables denominated in foreign currencies for periods consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on our costs and on the cash flows that we receive from foreign subsidiaries. Almost all foreign currency contracts are denominated in currencies of major industrial countries and are with large financial insti- tutions rated as strong investment grade by a major rat- ing agency. We also enter into foreign currency options to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize. The forward exchange contracts and foreign currency options entered into to hedge anticipated transactions have been designated as cash-flowhedges.As of June 30, 2003, these cash-flow hedges were highly effective, in all mate- rial respects. As a matter of policy, we only enter into contracts with counterparties that have at least an “A” (or equivalent) credit rating.The counterparties to these contracts are major financial institutions. We do not have significant exposure to any one counterparty. Our exposure to credit loss in the event of nonperformance by any of the coun- terparties is limited to only the recognized, but not real- ized,gains attributable to the contracts. Management believes risk of loss under these hedging contracts is remote and in any event would not be material to the con- solidated financial results. The contracts have varying maturities through the end of June 2004. Costs associ- ated with entering into such contracts have not been material to our consolidated financial results. We do not utilize derivative financial instruments for trading or We enter into interest rate derivative contracts to manage the exposure to fluctuations of interest rates on our funded and unfunded indebtedness, as well as cash invest- ments, for periods consistent with the identified expo- sures. All interest rate derivative contracts are with large financial institutions rated as strong investment grade by a major rating agency. In May 2003, we entered into an interest rate swap agreement with a notional amount of $250.0 million to effectively convert fixed interest on the existing $250.0 million 6% Senior Notes to variable interest rates based on LIBOR. We designated the swap as a fair value hedge. As of June 30, 2003, the fair value hedge was highly effec- tive, in all material respects. Additionally, in May 2003, we entered into a series of treasury lock agreements on a notional amount totaling $195.0 million at a weighted average all-in rate of 4.53%. These treasury lock agreements expire in September 2003 and are used to hedge the exposure to a possible rise in interest rates prior to the anticipated issuance of debt. The agreements will be settled upon the issuance of the new debt, if completed, and any realized gain or loss to be received or paid by us will be amortized in interest expense over the life of the new debt. We desig- nated the treasury lock agreements as cash flow hedges. As of June 30, 2003, the cash flow hedges were highly effective, in all material respects. We use a value-at-risk model to assess the market risk of our derivative financial instruments. Value-at-risk repre- sents the potential losses for an instrument or portfolio from adverse changes in market factors for a specified time period and confidence level. We estimate value- at-risk across all of our derivative financial instruments using a model with historical volatilities and correlations THEEST{E LAUDER COMPANIES INC. 53 Market Risk Interest Rate Risk Management Foreign Exchange Risk Management