Halliburton 2013 Annual Report Download - page 85

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Foreign currency exchange risk
We have operations in many international locations and are involved in transactions denominated in currencies other
than the United States dollar, our functional currency, which exposes us to foreign currency exchange rate risk. Techniques in
managing foreign currency exchange risk include, but are not limited to, foreign currency borrowing and investing and the use
of currency exchange instruments, some of which are designed to mitigate the impact of foreign currency risks related to the
Venezuelan bolívar. We attempt to selectively manage significant exposures to potential foreign currency exchange losses based
on current market conditions, future operating activities, and the associated cost in relation to the perceived risk of loss. The
purpose of our foreign currency risk management activities is to minimize the risk that our cash flows from the sale and
purchase of services and products in foreign currencies will be adversely affected by changes in exchange rates.
We use forward contracts and options to manage our exposure to fluctuations in the currencies of the countries in
which we do the majority of our international business. These instruments are not treated as hedges for accounting purposes,
generally have an expiration date of one year or less, and are not exchange traded. While these instruments are subject to
fluctuations in value, the fluctuations are generally offset by the value of the underlying exposures being managed. The use of
some of these instruments may limit our ability to benefit from favorable fluctuations in foreign currency exchange rates.
Derivatives are not utilized to manage exposures in some currencies due primarily to the lack of available markets or
cost considerations (non-traded currencies). We attempt to manage our working capital position to minimize foreign currency
exposure in non-traded currencies and recognize that pricing for the services and products offered in these countries should
account for the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.
The notional amounts of open foreign exchange derivatives were $769 million at December 31, 2013 and $324 million
at December 31, 2012. The notional amounts of these instruments do not generally represent amounts exchanged by the parties,
and thus are not a measure of our exposure or of the cash requirements related to these contracts. As such, cash flows related to
these contracts are typically not material. The amounts exchanged are calculated by reference to the notional amounts and by
other terms of the contracts, such as exchange rates.
Interest rate risk
We are subject to interest rate risk on our long-term debt and some of our long-term investments in fixed income
securities. Our short-term borrowings and short-term investments in fixed income securities do not give rise to significant
interest rate risk due to their short-term nature. We had fixed rate long-term debt totaling $7.8 billion at December 31, 2013 and
$4.8 billion at December 31, 2012, with none maturing before 2016. We also had $134 million of long-term investments in
fixed income securities at December 31, 2013 with maturities that extend through November 2016.
We maintain an interest rate management strategy that is intended to mitigate the exposure to changes in interest rates
in the aggregate for our investment portfolio. We hold a series of interest rate swaps relating to three of our debt instruments
with a total notional amount of $1.5 billion at a weighted-average, LIBOR-based, floating rate of 3.8% as of December 31,
2013. We utilize interest rate swaps to effectively convert a portion of our fixed rate debt to floating rates. These interest rate
swaps, which expire when the underlying debt matures, are designated as fair value hedges of the underlying debt and are
determined to be highly effective. The fair value of our interest rate swaps is included in “Other assets” in our consolidated
balance sheets as of December 31, 2013 and December 31, 2012. The fair value of our interest rate swaps was determined using
an income approach model with inputs, such as the notional amount, LIBOR rate spread, and settlement terms that are
observable in the market or can be derived from or corroborated by observable data (Level 2). These derivative instruments are
marked to market with gains and losses recognized currently in interest expense to offset the respective gains and losses
recognized on changes in the fair value of the hedged debt. At December 31, 2013, we had fixed rate debt aggregating $6.3
billion and variable rate debt aggregating $1.5 billion, after taking into account the effects of the interest rate swaps.
Credit risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents,
investments in fixed income securities, and trade receivables. It is our practice to place our cash equivalents and investments in
fixed income securities in high quality investments with various institutions. We derive the majority of our revenue from selling
products and providing services to the energy industry. Within the energy industry, our trade receivables are generated from a
broad and diverse group of customers. As of December 31, 2013, 34% of our gross trade receivables were in the United States
and 8% were in Venezuela, compared to 36% in the United States and 9% in Venezuela at December 31, 2012. We maintain an
allowance for losses based upon the expected collectability of all trade accounts receivable.
We do not have any significant concentrations of credit risk with any individual counterparty to our derivative
contracts. We select counterparties to those contracts based on our belief that each counterparty’s profitability, balance sheet,
and capacity for timely payment of financial commitments is unlikely to be materially adversely affected by foreseeable events.