Priceline 2011 Annual Report Download - page 57

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Off-Balance Sheet Arrangements.
As of December 31, 2011, we did not have any off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital
resources.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We manage our exposure to interest rate risk and foreign currency risk through internally established policies and
procedures and, when deemed appropriate, through the use of derivative financial instruments. We use foreign exchange
derivative contracts to manage short-term foreign currency risk.
The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting
from possible future adverse fluctuations in rates. We evaluate our exposure to market risk by assessing the anticipated near-
term and long-term fluctuations in interest rates and foreign exchange rates. This evaluation includes the review of leading
market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions
and the review of market projections as to expected future rates. We utilize this information to determine our own investment
strategies as well as to determine if the use of derivative financial instruments is appropriate to mitigate any potential future
market exposure that we may face. Our policy does not allow speculation in derivative instruments for profit or execution of
derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading
purposes and are not a party to any leveraged derivatives. To the extent that changes in interest rates and currency exchange
rates affect general economic conditions, the Priceline Group would also be affected by such changes.
We did not experience any material changes in interest rate exposures during the year ended December 31, 2011.
Based upon economic conditions and leading market indicators at December 31, 2011, we do not foresee a significant adverse
change in interest rates in the near future.
Fixed rate investments are subject to unrealized gains and losses due to interest rate volatility. We performed a
sensitivity analysis to determine the impact a change in interest rates would have on the fair value of our available for sale
investments assuming an adverse change of 100 basis points. A hypothetical 100 basis points (1.0%) increase in interest rates
would have resulted in a decrease in the fair values of our investments as of December 31, 2011 of approximately $8 million.
These hypothetical losses would only be realized if we sold the investments prior to their maturity.
As of December 31, 2011, the outstanding principal amount of our debt is $575 million. We estimate that the market
value of such debt was approximately $0.9 billion as of December 31, 2011. A substantial portion of the market value of our
debt in excess of the outstanding principal amount is related to the conversion premium on our outstanding convertible bonds.
As a result of the growth of Booking.com and Agoda, and the acquisition of rentalcars.com, we are conducting a
significant portion of our business outside the United States through subsidiaries with functional currencies other than the U.S.
Dollar (primarily Euros). As a result, we face exposure to adverse movements in currency exchange rates as the financial
results of our international operations are translated from local currency into U.S. Dollars upon consolidation. If the U.S.
Dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in
increased net assets, gross bookings, gross profit, operating expenses, and net income. Similarly, our net assets, gross
bookings, gross profit, operating expenses, and net income will decrease if the U.S. Dollar strengthens against local currency.
Additionally, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency
result in gains and losses that are reflected in the Consolidated Statement of Operations. Booking.com, Agoda and
rentalcars.com are subject to risks typical of international business, including, but not limited to, differing economic conditions,
changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
From time to time, we enter into foreign exchange derivative contracts to minimize the impact of short-term foreign
currency fluctuations on our consolidated operating results. Our derivative contracts principally address foreign exchange
fluctuation risk for the Euro and the British Pound Sterling. As of December 31, 2011, there were no outstanding derivative
contracts. As of December 31, 2010, these derivatives, which were not designated as hedging instruments for accounting
purposes, resulted in a liability of $0.2 million, recorded in "Accrued expenses and other current liabilities". Foreign exchange
gains of $4.0 million and $2.9 million for the years ended December 31, 2011 and 2010, respectively, and foreign exchange
losses of $2.7 million for the year ended December 31, 2009 were recorded in "Foreign currency transactions and other" in the
Consolidated Statements of Operations.