AT&T Wireless 2013 Annual Report Download - page 35

AT&T Inc. | 33
established interest rate risk limits that we closely monitor
by measuring interest rate sensitivities in our debt and
interest rate derivatives portfolios.
All our foreign-denominated long-term 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, 2013.
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, 2013.
MARKET RISK
We are exposed to market risks primarily from changes
in interest rates and foreign currency exchange rates.
These risks, along with other business risks, impact
our cost of capital. It is our policy to manage our debt
structure and foreign exchange exposure in order to
manage capital costs, control financial risks and maintain
financial flexibility over the long term. In managing
market risks, we employ derivatives according to
documented policies and procedures, including interest
rate swaps, interest rate locks, foreign currency exchange
contracts and combined interest rate foreign currency
contracts (cross-currency swaps). We do not use
derivatives for trading or speculative purposes. We do
not foresee significant changes in the strategies we use
to manage market risk in the near future.
Interest Rate Risk
The majority of our financial instruments are medium-
and long-term fixed-rate notes and debentures. Changes
in interest rates can lead to significant fluctuations in the
fair value of these instruments. 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 9 and 10. In managing interest
expense, we control our mix of fixed and floating rate debt,
principally through the use of interest rate swaps. We have
Maturity
Fair Value
2014 2015 2016 2017 2018 Thereafter Total 12/31/13
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional
Amount Maturing $ 500 $1,500 $ — $ — $1,000 $1,750 $4,750 $184
Weighted-Average Variable Rate Payable1 2.3% 3.2% 4.8% 5.9% 7.3% 7.9%
Weighted-Average Fixed Rate Receivable 4.6% 5.1% 5.7% 5.7% 5.8% 5.8%
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 425 basis points.
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.
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 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.