Pitney Bowes 2014 Annual Report Download - page 39

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29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and foreign currency fluctuations due to our investing and funding activities and
our operations denominated in different foreign currencies.
Our objective in managing exposure to foreign currency fluctuations is to reduce the volatility in earnings and cash flows associated with
the effect of foreign exchange rate changes on transactions that are denominated in foreign currencies. Accordingly, we enter into various
contracts, which change in value as foreign exchange rates change, to protect the value of external and intercompany transactions. The
principal currencies actively hedged are the British pound and Euro.
Our objective in managing exposure to changing interest rates is to limit the volatility and impact of changing interest rates on earnings
and cash flows. To achieve these objectives, we may enter into interest rate swap agreements that convert fixed rate interest payments to
variable rates and vice-versa. At December 31, 2014, 96% of our debt was fixed rate obligations at a weighted average interest rate of
5.2%. Our variable rate debt had a weighted average interest rate at December 31, 2014 of 2.48%. A one-percentage point change in the
effective interest rate of our variable rate debt would not have had a material impact on our 2014 pre-tax income.
We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks. We do
not enter into foreign currency or interest rate transactions for speculative purposes. The gains and losses on these contracts offset changes
in the value of the related exposures.
We utilize a "Value-at-Risk" (VaR) model to determine the potential loss in fair value from changes in market conditions. The VaR model
utilizes a "variance/co-variance" approach and assumes normal market conditions, a 95% confidence level and a one-day holding period.
The model includes all of our debt, interest rate derivative contracts and foreign exchange derivative contracts associated with forecasted
transactions. The model excludes all anticipated transactions, firm commitments and accounts receivables and payables denominated in
foreign currencies, which certain of these instruments are intended to hedge. The VaR model is a risk analysis tool and does not purport
to represent actual losses in fair value that will be incurred, nor does it consider the potential effect of favorable changes in market factors.
During 2014 and 2013, our maximum potential one-day loss in fair value of our exposure to foreign exchange rates and interest rates,
using the variance/co-variance technique described above, was not material.