AT&T Wireless 2008 Annual Report Download - page 46

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share amounts
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| AT&T Annual Report 2008
Interest Rate Sensitivity The principal amounts by
expected maturity, average interest rate and fair value of our
liabilities that are exposed to interest rate risk are described
in Notes 8 and 9. Following are our interest rate derivatives,
subject to interest rate risk as of December 31, 2008.
The interest rates illustrated in the interest rate swaps section
of the table below refer to the average expected rates we
would receive and the average expected rates we would pay
based on the contracts. The notional amount is the principal
amount of the debt subject to the interest rate swap
contracts. The net fair value asset (liability) represents the
amount we would receive or pay if we had exited the
contracts as of December 31, 2008.
Maturity
After Fair Value
2009 2010 2011 2012 2013 2013 Total 12/31/08
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional Amount — — $1,250 $1,750 $1,750 $1,000 $5,750 $564
Variable Rate Payable1 2.8% 2.4% 3.4% 3.6% 4.0% 4.1%
Weighted-Average Fixed Rate Receivable 5.6% 5.6% 5.5% 5.3% 5.6% 5.6%
1Interest payable based on current and implied forward rates for Three or Six Month LIBOR plus a spread ranging between approximately 36 and 175 basis points.
We had fair value interest rate swaps with a notional value
of $5,750 with a net carrying and fair value asset of $564 at
December 31, 2008. At December 31, 2007, we had notional
value of $3,250 with an asset of $88.
Foreign Exchange Forward Contracts The fair value of
foreign exchange contracts is subject to changes in foreign
currency exchange rates. For the purpose of assessing specific
risks, we use a sensitivity analysis to determine the effects
that market risk exposures may have on the fair value of our
financial instruments and results of operations. To perform the
sensitivity analysis, we assess the risk of loss in fair values
from the effect of a hypothetical 10% change in the value
of foreign currencies (negative change in the value of the
U.S. dollar), assuming no change in interest rates. See Note 9
to the consolidated financial statements for additional
information relating to notional amounts and fair values
of financial instruments.
For foreign exchange forward contracts outstanding at
December31, 2008, assuming a hypothetical 10% depreciation
of the U.S. dollar against foreign currencies from the prevailing
foreign currency exchange rates, the fair value of the foreign
exchange forward contracts (net liability) would have
decreased approximately $13. Because our foreign exchange
contracts are entered into for hedging purposes, we believe
that these losses would be largely offset by gains on the
underlying transactions.
The risk of loss in fair values of all other financial
instruments resulting from a hypothetical 10% change in
market prices was not significant as of December31, 2008.
QUALITATI V E I N FORMAT I ON ABOUT MARKET RI S K
Foreign Exchange Risk From time to time, we make
investments in businesses in foreign countries, receive
dividends and proceeds from sales or borrow funds in
foreign currency. Before making an investment, or in
anticipation of a foreign currency receipt, we often will
enter into forward foreign exchange contracts. The contracts
are used to provide currency at a fixed rate. Our policy is
to measure the risk of adverse currency fluctuations by
calculating the potential dollar losses resulting from changes
in exchange rates that have a reasonable probability of
occurring. We cover the exposure that results from changes
that exceed acceptable amounts. We do not speculate in
foreign exchange markets.
Interest Rate Risk We issue debt in fixed and floating
rate instruments. Interest rate swaps are used for the purpose
of controlling interest expense by managing the mix of fixed
and floating rate debt. Interest rate forward contracts are
utilized to hedge interest expense related to debt financing.
We do not seek to make a profit from changes in interest
rates. We manage interest rate sensitivity by measuring
potential increases in interest expense that would result from
a probable change in interest rates. When the potential
increase in interest expense exceeds an acceptable amount,
we reduce risk through the issuance of fixed-rate (in lieu of
variable-rate) instruments and the purchase of derivatives.