Quantitative Market Risk Exposure Assessment: Costco Wholesale Corp.

This report synthesizes the market risk disclosures from the company's SEC filing, providing a structured assessment of its exposure to financial and commodity-driven risks.

Interest Rate Sensitivity

The company maintains moderate sensitivity to interest rate fluctuations primarily through its investment portfolio and long-term debt obligations.

Exposure Magnitude and Nature

• Investment Holdings: The majority of short-term investments are in fixed interest-rate securities, which are subject to fair value changes due to interest rate shifts. These holdings are diversified among cash equivalents and government/agency securities (3 months to 5 years maturity).
• Long-Term Debt: As of the end of 2025, long-term debt with fixed interest rates totaled $5,805 million. Fluctuations in market rates may affect the fair value of this debt.

Mitigation and Assessment

• Strengths (Mitigation): The company's investment policy emphasizes preserving principal. Investments are strictly limited to U.S. government/agency obligations or equivalent instruments. Furthermore, a 100 basis point change in interest rates was deemed to have an immaterial incremental change in fair market value for investments.
• Weaknesses (Exposure): The fixed-rate nature of the long-term debt means that while the company is protected from rising variable rate costs, its balance sheet is exposed to potential changes in the fair value of this debt if rates fluctuate significantly.

Foreign Currency Exposure

The company faces transaction risk due to international operations conducted in non-functional currencies.

Exposure Magnitude and Nature

• Risk Type: The primary exposure stems from foreign subsidiaries conducting transactions in non-functional currencies, specifically related to U.S. dollar merchandise inventory expenditures.
• Impact Quantification: A hypothetical 10% strengthening of functional currencies compared to the non-functional currency exchange rates at August 31, 2025, was projected to decrease the fair value of hedging contracts by approximately $117 million, resulting in an unrealized loss recorded in the consolidated statements of income.

Mitigation and Assessment

• Strengths (Mitigation): The company actively manages this risk using forward foreign-exchange contracts. These instruments are used specifically to economically hedge known future expenditures, demonstrating a proactive approach to mitigating transaction risk without engaging in speculative transactions.
• Weaknesses (Exposure): Despite hedging efforts, the exposure remains material enough that a 10% currency shift results in a quantifiable unrealized loss of $117 million.

Commodity Price Risk

The company is exposed to fluctuations in energy and other commodities critical to its retail and manufacturing operations.

Exposure Magnitude and Nature

• Key Commodities: Electricity, natural gas, and fuel for gas stations are the primary areas of exposure.
• Contract Structure: The company utilizes a mix of contracts: fixed-price contracts for certain facilities (U.S./Canada) and variable-priced contracts (on an index basis) for other purchases.

Mitigation and Assessment

• Strengths (Mitigation): Risk is partially mitigated by securing fixed-price contracts for specific warehouses and facilities. Additionally, the use of variable-priced contracts qualifies under the "normal purchases and normal sales" exception, which exempts them from requiring mark-to-market adjustments.
• Weaknesses (Exposure): The reliance on index-based, variable-priced contracts means that core operational costs remain susceptible to market volatility in energy prices.

Equity Price Risk

The document does not provide specific quantitative disclosures regarding exposure to public equity markets or investment portfolio risk beyond the general description of its fixed-income holdings.

Exposure Magnitude and Nature

• Disclosure: The company explicitly states it does not engage in speculative transactions or hold financial instruments for trading purposes. Its investments are primarily focused on cash equivalents, government/agency securities, and money market funds.
• Assessment: Based solely on the provided text, there is no quantified exposure to general equity price risk; the investment strategy appears conservative and defensive.

Quantitative Measures Disclosed

The company provides specific quantitative examples of potential impacts but does not disclose comprehensive risk metrics.

Assessment

• Disclosures Provided: The filing offers two key hypothetical scenarios: (1) an immaterial incremental change in fair market value resulting from a 100 basis point interest rate shift, and (2) a quantifiable unrealized loss of approximately $117 million resulting from a 10% foreign currency strengthening.
• Gaps: The disclosure is limited to these specific sensitivity examples. There is no mention of advanced quantitative measures such as Value-at-Risk (VaR), comprehensive sensitivity tables, or formal stress test results.

Overall Assessment Summary