Market risk is the potential for loss from adverse changes in the market value of financial instruments. The level of market risk to which we are exposed varies depending on the composition of our derivative instrument portfolio, as well as current and expected market conditions. The following discussion provides additional detail regarding our exposure to the risks of changing commodity prices, interest rates and foreign exchange rates. A discussion of enterprise-wide risk management can be found here. A discussion of certain liquidity and credit risk related to our investments can be found under "Liquidity and Capital Resources – Investment Liquidity" here.
Commodity Risk
Our natural gas purchase strategy is based on diversification for our total gas requirements (which represent the forecast consumption of natural gas volumes by our manufacturing and mining facilities). The objective is to acquire a reliable supply of natural gas feedstock and fuel on a location-adjusted, cost-competitive basis in a manner that minimizes volatility without undue risk.
Our US nitrogen results are significantly affected by the price of natural gas. As discussed above, we employ derivative commodity instruments related to a portion of our natural gas requirements (primarily futures, swaps and options) for the purpose of managing our exposure to commodity price risk in the purchase of natural gas, not for speculative or trading purposes. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas.
A sensitivity analysis has been prepared to estimate our market risk exposure arising from derivative commodity instruments. The fair value of such instruments is calculated by valuing each position using quoted market prices where available or prices provided by other external sources. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in such prices. The results of this analysis indicate that as of December 31, 2007, our estimated derivative commodity instruments' market risk exposure was $48.9 million (2006 – $30.5 million), based on our gas hedging contracts fair-valued at $127.5 million (2006 – $120.3 million). Actual results may differ from this estimate. Changes in the fair value of such derivative instruments, with maturities in 2008 through 2017, will generally relate to changes in the spot price of natural gas purchases.
Interest Rate Risk
We address interest rate risk by using a diversified portfolio of fixed and floating rate instruments. This exposure is also managed by aligning current and long-term assets with demand and fixed-term debt and by monitoring the effects of market changes in interest rates.
As at December 31, 2007, our short-term debt (comprised of commercial paper) was $90.0 million, our current portion of long- term debt obligation maturities was $0.2 million and our long-term portion of debt obligation maturities was $1,358.3 million. Long-term debt obligation maturities, including the current portion, are comprised primarily of $1,350.0 million of senior notes that were issued under our US shelf registration statements. Since most of our outstanding borrowings have fixed interest rates, the primary market risk exposure is to changes in fair value. It is estimated that, all else constant, a hypothetical 10 percent change in interest rates would not materially impact our results of operations or financial position. If interest rates changed significantly, management would take appropriate actions to manage our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.
We are also exposed to changes in interest rates related to our investments in marketable securities and auction rate securities. At December 31, 2007, our marketable securities in cash and cash equivalents had a face value and fair value of $719.5 million, and auction rate securities had a face value of $132.5 million and fair value of $56.0 million. Interest rates on marketable securities are floating and therefore vary directly with the Canadian and US market interest rates. Interest rates on auction rate securities are typically reset every 28 days through the sale of the securities in a dutch auction process; however, in the event of market illiquidity the interest rate is reset based on a spread to LIBOR. As a result of current negative conditions in the global credit markets, auctions for the investments in these securities that are held in the company's trading account have recently failed to settle on their respective settlement dates and instead have paid interest based on the prescribed spread to LIBOR. As of December 31, 2007, our estimated interest rate risk exposure on our marketable securities was minimal due to the short-term nature of the investments, as was the impact on auction rate securities since the provisions of those agreements, in the current market situation, guarantee a fixed spread regardless of where the market interest rates move. It is estimated that, all else constant, a hypothetical 10 percent change in interest rates would not materially impact our results of operations or financial position.
Foreign Exchange Risk
We also enter into foreign currency forward contracts for the primary purpose of limiting exposure to exchange rate fluctuations relating to Canadian dollar operating and capital expenditures and capital expenditures denominated in currencies other than the US or Canadian dollar. These contracts are not designated as hedging instruments for accounting purposes. Gains or losses resulting from foreign exchange contracts are recognized in earnings in the period in which changes in fair value occur.
As at December 31, 2007, we had entered into foreign currency forward contracts to sell US dollars and receive Canadian dollars in the notional amount of $60.0 million (2006 – $100.0 million) at an average exchange rate of 1.0176 (2006 – 1.1478) per US dollar and to sell US dollars and receive Hong Kong dollars in the notional amount of $174.5 million (2006 –$NIL) at an average exchange rate of 7.7937 (2006 – NIL) per US dollar. The company had also entered into other small forward contracts. Maturity dates for all forward contracts are within 2008 and 2009.