Quantitative Market Risk Exposure Assessment (CARMAX INC)

Interest Rate Sensitivity

Magnitude of Exposure and Composition:
The company exhibits significant exposure to interest rate risk across two primary areas: non-recourse notes payable and other corporate debt. The total non-recourse notes payable increased from $15,466.8 million in 2022 to $16,360.1 million in 2023. Crucially, the variable-rate portion of these notes rose substantially from $4,518.7 million (2022) to $5,943.7 million (2023), indicating an increasing reliance on floating-rate funding vehicles like warehouse facilities. Furthermore, other corporate debt (revolving credit facility and term loans) is described as being substantially variable-rate based on LIBOR.

Mitigation Strategies:
The company employs derivative instruments to mitigate interest rate risk associated with its non-recourse funding vehicles. These derivatives are specifically used "to manage differences in the amount of our known or expected cash receipts and our known or expected cash payments." Additionally, derivatives mitigate a portion of the variable-rate risk related to other corporate debt.

Quantitative Impact:
The potential impact is quantified:

• A 100-basis point increase in market interest rates on non-recourse funding vehicles would decrease fiscal 2023 net earnings per share (EPS) by approximately $0.17.
• A 100-basis point increase in market interest rates related to other debt would decrease FY2023 EPS by approximately $0.04.

Assessment:

• Strength: The company actively uses derivative instruments and deals with highly rated bank counterparties to manage risk.
• Weakness: The increasing proportion of variable-rate debt in the non-recourse portfolio ($5,943.7M in 2023) suggests a growing sensitivity to rising interest rates, as evidenced by the material EPS impact ($0.17).

Equity Price Risk

Magnitude of Exposure and Composition:
Equity price risk is tied specifically to compensation expense related to cash-settled restricted stock units (RSUs), which are classified as liability awards. The mark-to-market effect on this liability makes the associated compensation expense sensitive to fluctuations in the company's stock price.

Quantitative Impact:
The exposure is quantified by stating that a 10% change in the company's stock price would have affected fiscal 2023 net earnings per share by approximately $0.01.

Assessment:

• Strength: The impact on EPS from this specific risk ($0.01) appears relatively contained compared to interest rate exposures.
• Weakness: The company is exposed to volatility in its own stock price through its compensation structure, which introduces a non-operational financial risk into earnings calculations.

Quantitative Measures and Pension Risk

Pension Plan Exposure (PBO):
The pension plan carries an interest rate risk related to its Projected Benefit Obligation (PBO). This exposure is quantified by noting that a 100-basis point change in the discount rate has approximately a 16% effect on the PBO balance. A decrease in the discount rate would have decreased FY2023 net earnings per share by less than $0.01.

Assessment:

• The company provides specific quantitative metrics for pension liability sensitivity, allowing stakeholders to gauge the magnitude of this long-term financial risk.

Foreign Currency Exposure

Based solely on the provided document, there is no disclosure regarding foreign currency exposure (e.g., currencies involved, translation risk, or transaction risk).

Commodity Price Risk

Based solely on the provided document, there is no disclosure regarding commodity price risk (e.g., key commodities, contract structures, or impact on margins).