●  COSTCO WHOLESALE CORP /NEW · FY 2024 

Market Risk

A review of Costco Wholesale Corp.'s market risk disclosures reveals that global operations carry significant financial exposure, particularly from currency fluctuations. For example, a hypothetical 10% strengthening of functional exchange rates could translate into an unrealized loss of approximately $120 million on the consolidated income statement. This scenario highlights the direct, quantifiable impact of foreign currency movements, even when the company utilizes forward contracts to manage known future expenditures.

COST L1 Synthesis
●  SYMBOLOGY.ONLINE l1 SYNTHESIS 

Costco Wholesale Corp /new Market Risk Synthesis

Quantitative Market Risk Exposure Assessment

This report synthesizes Costco Wholesale Corp.'s market risk disclosures from the 10-K filing, providing a structured assessment of their exposure to financial and commodity market fluctuations.

Interest Rate Sensitivity

Exposure Magnitude and Nature

Costco's interest rate exposure is primarily derived from its investment holdings, which consist of diversified cash equivalents and short-term government/agency securities (maturities generally 3 months to 5 years). The majority of these investments are in fixed interest-rate securities. Additionally, the company carries long-term debt ($5,919 million as of end of 2024) which is fixed-rate.

Mitigation and Impact
  • Mitigation: The company maintains a policy of investing in highly secure instruments (U.S. government/agency obligations, money market funds). For available-for-sale investments, unrealized gains or losses are reflected in Accumulated Other Comprehensive Income (AOCI).
  • Impact: The disclosure indicates that a 100 basis point change in interest rates as of the end of 2024 would have resulted in an immaterial incremental change in fair market value for its investments.
Assessment (Strengths/Weaknesses)
  • Strength: The investment portfolio is highly conservative, focused on preserving principal and generating yields, minimizing exposure to high-volatility instruments.
  • Weakness: While the impact on short-term investments is deemed immaterial, the fixed nature of the $5,919 million long-term debt means that interest rate fluctuations could still affect its fair value.

Foreign Currency Exposure

Exposure Magnitude and Nature

The company faces foreign currency risk due to transactions conducted by its international subsidiaries in non-functional currencies. This exposure is specifically tied to U.S. dollar merchandise inventory expenditures made abroad.

Mitigation and Impact
  • Mitigation: Costco actively manages this risk using forward foreign-exchange contracts, which are intended to economically hedge known future expenditures. The company explicitly states it does not intend to engage in speculative transactions.
  • Impact: A hypothetical 10% strengthening of functional currencies compared to non-functional currency exchange rates at September 1, 2024, would have decreased the fair value of these contracts by approximately $120 million, resulting in an unrealized loss recorded in the consolidated statements of income.
Assessment (Strengths/Weaknesses)
  • Strength: The company employs specific hedging instruments (forward contracts) to mitigate the impact of known future foreign currency expenditures.
  • Weakness: The hypothetical loss scenario demonstrates a direct, quantifiable impact on the income statement from adverse currency movements.

Commodity Price Risk

Exposure Magnitude and Nature

Costco is exposed to price fluctuations in energy (electricity and natural gas) and other commodities utilized across its retail and manufacturing operations.

Mitigation and Impact
  • Mitigation: The company employs a dual strategy: 1) Partially mitigating risk through fixed-price contracts for certain facilities (predominantly in the U.S. and Canada). 2) Utilizing variable-priced contracts on an index basis for some purchases.
  • Impact: The derivative instruments used in commodity contracts generally qualify for the "normal purchases and normal sales" exception under authoritative guidance, meaning they typically do not require mark-to-market adjustments.
Assessment (Strengths/Weaknesses)
  • Strength: The use of fixed-price contracts provides a degree of cost certainty for operational facilities.
  • Weakness: The reliance on variable-priced index contracts means that a significant portion of operational costs remains subject to market volatility, though this risk is managed under specific accounting exceptions.

Equity Price Risk

Exposure Magnitude and Nature

The provided disclosure does not detail specific exposure to equity price risk, such as through publicly traded investment portfolios. The focus of the disclosed investments is on fixed-income securities and cash equivalents.

Mitigation and Impact
  • No specific exposure or mitigation strategies related to equity price risk are disclosed in this section.

Quantitative Measures

Disclosed Metrics

The filing provides two specific quantitative scenarios:

  1. Interest Rate Sensitivity: A 100 basis point change in interest rates was deemed to have an immaterial incremental change in fair market value for investments.
  2. Foreign Currency Sensitivity: A hypothetical 10% strengthening of functional currencies resulted in an unrealized loss of approximately $120 million.
Assessment (Strengths/Weaknesses)
  • Strength: The company provides specific, quantifiable hypothetical scenarios for both interest rate and foreign currency risk.
  • Weakness: The disclosure does not provide advanced quantitative measures such as Value-at-Risk (VaR), detailed sensitivity tables beyond the two examples, or results from formal stress testing.