IBM 2014 Annual Report Download - page 73

72 Management Discussion
International Business Machines Corporation and Subsidiary Companies
In January 2014, the Argentinian government devalued its cur-
rency from 6 pesos to the U.S. dollar to 8 pesos to the U.S. dollar.
This devaluation did not have a material impact given the size of
the company’s operations in Argentina (less than 1percent of total
2014 revenue).
Market Risk
In the normal course of business, the financial position of the com-
pany is routinely subject to a variety of risks. In addition to the
market risk associated with interest rate and currency movements
on outstanding debt and non-U.S. dollar denominated assets and
liabilities, other examples of risk include collectibility of accounts
receivable and recoverability of residual values on leased assets.
The company regularly assesses these risks and has estab -
lished policies and business practices to protect against the
adverse effects of these and other potential exposures. As a
result, the company does not anticipate any material losses from
these risks.
The company’s debt, in support of the Global Financing busi-
ness and the geographic breadth of the company’s operations,
contains an element of market risk from changes in interest and
currency rates. The company manages this risk, in part, through
the use of a variety of financial instruments including derivatives, as
described in noteD, “Financial Instruments—Derivative Financial
Instruments,” on pages 105 through 109.
To meet disclosure requirements, the company performs a
sensitivity analysis to determine the effects that market risk expo-
sures may have on the fair values of the company’s debt and other
financial instruments.
The financial instruments that are included in the sensitivity
analysis are comprised of the company’s cash and cash equiva-
lents, marketable securities, short-term and long-term loans,
commercial financing and installment payment receivables,
investments, long-term and short-term debt and derivative finan-
cial instruments. The company’s derivative financial instruments
generally include interest rate swaps, foreign currency swaps and
forward contracts.
To perform the sensitivity analysis, the company assesses the
risk of loss in fair values from the effect of hypothetical changes
in interest rates and foreign currency exchange rates on market-
sensitive instruments. The market values for interest and foreign
currency exchange risk are computed based on the present value
of future cash flows as affected by the changes in rates that are
attributable to the market risk being measured. The discount
rates used for the present value computations were selected
based on market interest and foreign currency exchange rates
in effect at December31, 2014 and 2013. The differences in this
comparison are the hypothetical gains or losses associated with
each type of risk.
Information provided by the sensitivity analysis does not neces-
sarily represent the actual changes in fair value that the company
would incur under normal market conditions because, due to prac-
tical limitations, all variables other than the specific market risk
factor are held constant. In addition, the results of the model are
constrained by the fact that certain items are specifically excluded
from the analysis, while the financial instruments relating to the
financing or hedging of those items are included by definition.
Excluded items include short-term and long-term receivables
from sales-type and direct financing leases, forecasted foreign
currency cash flows and the company’s net investment in foreign
operations. As a consequence, reported changes in the values
of some of the financial instruments impacting the results of the
sensitivity analysis are not matched with the offsetting changes
in the values of the items that those instruments are designed to
finance or hedge.
The results of the sensitivity analysis at December31, 2014 and
2013, are as follows:
Interest Rate Risk
At December31, 2014, a 10percent decrease in the levels of inter-
est rates with all other variables held constant would result in a
decrease in the fair value of the company’s financial instruments
of $123 million as compared with a decrease of $322 million at
December31, 2013. A 10percent increase in the levels of inter-
est rates with all other variables held constant would result in an
increase in the fair value of the company’s financial instruments of
$119 million as compared to an increase of $300 million at Decem-
ber31, 2013. Changes in the relative sensitivity of the fair value of
the company’s financial instrument portfolio for these theoretical
changes in the level of interest rates are primarily driven by changes
in the company’s debt maturities, interest rate profile and amount.
Foreign Currency Exchange Rate Risk
At December31, 2014, a 10percent weaker U.S. dollar against
foreign currencies, with all other variables held constant, would
result in an increase in the fair value of the company’s financial
instruments of $872 million as compared with an increase of $1,340
million at December31, 2013. Conversely, a 10percent stronger
U.S. dollar against foreign currencies, with all other variables
held constant, would result in a decrease in the fair value of the
company’s financial instruments of $872 million compared with a
decrease of $1,340 million at December31, 2013. The change in
impact from 2013 to 2014 was comprised of: a decrease in assets
($123 million), an increase in debt ($362 million) and an increase in
derivatives ($230 million).
Financing Risks
See the “Description of Business” on page 31 for a discussion of
the financing risks associated with the Global Financing business
and management’s actions to mitigate such risks.