## INTEREST RATE RISK 

We are exposed to interest rate volatility with regard to future issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include U.S. Treasury rates, LIBOR, and commercial paper rates in the United States and Europe. We use interest rate swaps and forward-starting interest rate swaps to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed-rate versus floating-rate debt, based on current and projected market conditions. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed upon notional principal amount. 

As of May 30, 2010, we had $3.8 billion of aggregate notional principal amount outstanding, with a net notional amount of $556 million that converts floating-rate notes to fixed rates. This includes notional amounts of offsetting swaps that neutralize our exposure to interest rates on other interest rate swaps. 

## FOREIGN EXCHANGE RISK 

Foreign currency fluctuations affect our net investments in for- eign subsidiaries and foreign currency cash flows related to foreign-denominated commercial paper, third party purchases, intercompany loans, and product shipments. We are also exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the Australian dollar, British pound sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen, and Mexican peso.We mainly use foreign currency forward contracts to selectively hedge our foreign currency cash flow exposures.We also generally swap our foreign-denominated commercial paper borrowings and nonfunctional currency inter- company loans back to U.S. dollars or the functional currency; the gains or losses on these derivatives offset the foreign currency revaluation gains or losses recorded in earnings on the associated borrowings. We generally do not hedge more than 18 months forward. 

We also have many net investments in foreign subsidiaries that are denominated in euros. We previously hedged a portion of these net investments by issuing euro-denominated commercial paper and foreign exchange forward contracts. As of May 30, 

2010, we had deferred net foreign currency transaction losses of $96 million in AOCI associated with hedging activity. 

## COMMODITY PRICE RISK 

Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize deriv- atives to manage price risk for our principal ingredients and energy costs, including grains (oats, wheat, and corn), oils (prin- cipally soybean), non-fat dry milk, natural gas, and diesel fuel. Our primary objective when entering into these derivative contracts is to achieve certainty with regard to the future price of commod- ities purchased for use in our supply chain. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-the-counter options and swaps. We offset our expo- sures based on current and projected market conditions and generally seek to acquire the inputs at as close to our planned cost as possible. 

As of May 30, 2010, the net notional value of commodity derivatives was $464 million, of which $295 million related to agricultural inputs and $169 million related to energy inputs. These contracts relate to inputs that generally will be utilized within the next 12 months. 

## EQUITY INSTRUMENTS 

Equity price movements affect our compensation expense as certain investments made by our employees in our deferred compensation plan are revalued.We use equity swaps to manage this market risk. 

## VALUE AT RISK 

The estimates in the table below are intended to measure the maximum potential fair value we could lose in one day from adverse changes in market interest rates, foreign exchange rates, commodity prices, and equity prices under normal market con- ditions. A Monte Carlo value-at-risk (VAR) methodology was used to quantify the market risk for our exposures. The models assumed normal market conditions and used a 95 percent con- fidence level. 

