AT&T Wireless 2012 Annual Report Download - page 55

AT&T Inc. | 53
All our foreign-denominated debt has been swapped from
fixed-rate foreign currencies to fixed-rate U.S. dollars at
issuance through cross-currency swaps, removing interest
rate risk and foreign currency exchange risk associated with
the underlying interest and principal payments. Likewise,
periodically we enter into interest rate locks to partially
hedge the risk of increases in the benchmark interest rate
during the period leading up to the probable issuance of
fixed-rate debt. We expect gains or losses in our cross-
currency swaps and interest rate locks to offset the losses
and gains in the financial instruments they hedge.
Following are our interest rate derivatives subject to material
interest rate risk as of December 31, 2012. The interest rates
illustrated below refer to the average rates we expect to pay
based on current and implied forward rates and the average
rates we expect to receive based on derivative contracts.
The notional amount is the principal amount of the debt
subject to the interest rate swap contracts. The fair value
asset (liability) represents the amount we would receive (pay)
if we had exited the contracts as of December 31, 2012.
Maturity
Fair Value
2013 2014 2015 2016 2017 Thereafter Total 12/31/2012
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional
Amount Maturing $ — $ 500 $1,500 $ — $ — $1,000 $3,000 $287
Weighted-Average Variable Rate Payable1 1.3% 1.3% 1.6% 2.5% 3.1% 3.5%
Weighted-Average Fixed Rate Receivable 4.0% 3.9% 4.5% 5.6% 5.6% 5.6%
1 Interest payable based on current and implied forward rates for One, Three, or Six Month LIBOR plus a spread ranging between approximately 4 and 275 basis points.
Foreign Exchange Risk
We are exposed to foreign currency exchange risk through
our foreign affiliates and equity investments in foreign
companies. We do not hedge foreign currency translation risk
in the net assets and income we report from these sources.
However, we do hedge a large portion of the exchange risk
involved in anticipation of highly probable foreign currency-
denominated transactions and cash flow streams, such as
those related to issuing foreign-denominated debt, receiving
dividends from foreign investments, and other receipts and
disbursements.
Through cross-currency swaps, all our foreign-denominated
debt has been swapped from fixed-rate foreign currencies to
fixed-rate U.S. dollars at issuance, removing interest rate risk
and foreign currency exchange risk associated with the
underlying interest and principal payments. We expect gains
or losses in our cross-currency swaps to offset the losses and
gains in the financial instruments they hedge.
In anticipation of other foreign currency-denominated
transactions, we often enter into foreign exchange forward
contracts 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.
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% depreciation of the
U.S. dollar against foreign currencies from the prevailing
foreign currency exchange rates, assuming no change in
interest rates. For foreign exchange forward contracts
outstanding at December 31, 2012, the change in fair value
was immaterial. Furthermore, 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.