MARKET RISKS AND SENSITIVITY ANALYSES
Praxair is exposed to market risks relating to fluctuations in interest rates and currency exchange rates. The objective of financial risk management at Praxair is to minimize the negative impact of interest rate and foreign exchange rate fluctuations on the company’s earnings, cash flows and equity.

To manage these risks, Praxair uses various derivative financial instruments, including interest rate swaps, currency swaps, forward contracts and commodity contracts. Praxair only uses commonly traded and non-leveraged instruments. These contracts are entered into primarily with major banking institutions thereby minimizing the risk of credit loss. Also, refer to Notes 2 and 15 to the consolidated financial statements for a more complete description of Praxair’s accounting policies and use of such instruments.

The following discussion presents the sensitivity of the market value, earnings and cash flows of Praxair’s financial instruments to hypothetical changes in interest and exchange rates assuming these changes occurred at December 31, 2003. The range of changes chosen for these discussions reflect Praxair’s 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 interest rate and exchange rate assumptions.

INTEREST RATE AND DEBT SENSITIVITY ANALYSIS
At December 31, 2003, Praxair had debt totaling $2,816 mil-lion ($2,748 million at December 31, 2002). At December 31, 2003, no interest rate swap agreements existed. At December 31, 2002, a $100 million interest rate swap agreement converted outstanding floating rate operating lease payments to fixed rate payments for the period of the swap agreement which matured in 2003. Interest rate swaps are entered into as hedges of underlying financial instruments to effectively change the characteristics of the interest rate without actually changing the underlying financial instrument. For fixed rate instruments, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for floating rate instruments, interest rate changes generally do not affect the fair market value but impact future earnings and cash flows, assuming other factors are held constant.

At December 31, 2003, Praxair had fixed rate debt of $2,465 million and floating rate debt of $351 million, representing 88% and 12%, respectively, of total debt. At December 31, 2002, Praxair had fixed rate debt of $2,447 million and floating rate debt of $301 million, representing 89% and 11%, respectively, of total debt. Holding other variables constant (such as foreign exchange rates, swaps and debt levels), a one percentage point decrease in interest rates would increase the unrealized fair market value of the fixed rate debt by approximately $119 million ($94 million in 2002). At December 31, 2003 and 2002, the after-tax earnings and cash flows impact for next year resulting from a one percentage point increase in interest rates would be approximately $2 million, holding other variables constant.

EXCHANGE RATE SENSITIVITY ANALYSIS
Praxair’s exchange rate exposures result primarily from its investments and ongoing operations in South America (primarily Brazil, Argentina and Venezuela), Europe (primarily Spain and Italy), Canada, Mexico, Asia (primarily China, India, Korea and Thailand) and other business transactions such as the procurement of equipment from foreign sources. Among other techniques, Praxair utilizes foreign exchange forward contracts to hedge these exposures. At December 31, 2003, Praxair had $512 million notional amount ($433 million at December 31, 2002) of foreign exchange contracts of which $502 million ($223 million in 2002) are to hedge recorded balance sheet exposures or firm commitments and $10 million ($210 million in 2002) are to hedge anticipated future net income. At December 31, 2003, Praxair’s net income hedges relate to anticipated 2004 net income in Canada.

Holding other variables constant, if there were a 10% adverse change in foreign currency exchange rates for the portfolio, the fair market value of foreign currency contracts outstanding at December 31, 2003 would decrease by approximately $38 million ($28 million at December 31, 2002). Of this decrease, about $1 million ($14 million at December 31, 2002) would impact earnings and the remaining $37 million would be offset by an equal but offsetting gain or loss on the foreign currency fluctuation of the underlying exposure being hedged ($14 million at December 31, 2002).