Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other global companies, we are exposed to market risks relating to fluctuations in commodity prices, interest rates and foreign currency exchange rates. The objective of our financial risk management is to minimize the negative impact of commodity price, interest rate and foreign exchange rate fluctuations on our earnings, cash flows and equity.
To manage commodity price risk, we enter into swap contracts for future forecasted purchases of copper. This reduces the impact of commodity price volatility on gross profit. To manage the interest rate risks, we use a combination of fixed and variable rate debt. This reduces the impact of short-term fluctuations in interest rates. To manage foreign currency exchange rate risks, we use forward exchange contracts to hedge firm commitments up to twelve months and all such contracts are marked to market with the recognition of a gain or loss at each reporting period.
The following analyses present the sensitivity of the market value, earnings and cash flows of our financial instruments and foreign operations to hypothetical changes in interest and exchange rates and market prices for copper as if these changes occurred at December 31, 2020. The range of changes chosen for these analyses reflects our view of changes which are reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate, exchange rate and copper price assumptions. These forward-looking statements are selective in nature and only address the potential impacts from financial instruments and foreign operations. They do not include other potential effects that could impact our business as a result of these changes.
Commodity Price Sensitivity Analysis. Our exposure to market risk for changes in copper prices relates primarily to the purchase price of the raw material and the fixed price sales agreements we have with customers of our PC segment. We utilize swap contracts to manage this price risk. As of December 31, 2020, we had outstanding copper swap contracts totaling 73.8 million pounds and the fair value of these contracts resulted in an unrealized gain of $69.2 million. A portion of the gain totaling $58.3 million, before tax, is recognized in other comprehensive income and a portion of the gain totaling $10.9 million is recognized in income, before tax. Holding other variables constant, if there were a 10 percent reduction in the December 31, 2020 market price of copper, the fair value of these contracts would be a gain of $43.4 million. This hypothetical gain would be allocated $36.6 million to other comprehensive income and $6.8 million would be recognized in income, before tax.
Interest Rate and Debt Sensitivity Analysis . Our exposure to market risk for changes in interest rates relates primarily to our debt obligations. We have fixed and variable rate debt and the ability to incur variable rate debt under the Koppers Inc. Credit Facility.
At December 31, 2020, we had $500.0 million of fixed rate debt and $275.9 million of variable rate debt. Our ratio of fixed rate debt to variable rate debt at December 31, 2020 was approximately 181 percent. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. For variable rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant.
Holding other variables constant (such as debt levels and foreign exchange rates), a one percentage point decrease in interest rates at December 31, 2020 would have increased the fair market value of the fixed rate debt by approximately $4.5 million. The earnings and cash flows for the year ending December 31, 2020, assuming a one percentage point increase in interest rates, would have decreased approximately $2.8 million, holding other variables constant for variable rate debt.
Exchange Rate Sensitivity Analysis . Our exchange rate exposures result primarily from our investment and ongoing operations in Australia, Brazil, Canada, Chile, Denmark, the Netherlands, New Zealand and the United Kingdom. Holding other variables constant, if there were a ten percent reduction in all relevant exchange rates, the effect on our earnings, based on actual earnings from foreign operations for the year ended December 31, 2020, would be a reduction of approximately $7.1 million.
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