Priceline 2015 Annual Report Download - page 71

Off-Balance Sheet Arrangements.
As of December 31, 2015 , 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, we would also be affected by such changes.
We did not experience any material changes in interest rate exposures during the year ended December 31, 2015 . Based upon economic conditions and
leading market indicators at December 31, 2015 , 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 point (1.0%) increase in interest rates would have resulted in a decrease in the fair values of our investments as of December 31, 2015 of approximately
$135.1 million. These hypothetical losses would only be realized if we sold the investments prior to their maturity.
As of December 31, 2015 , the outstanding aggregate principal amount of our debt was approximately $6.5 billion . We estimate that the market value of
such debt was approximately $7.0 billion as of December 31, 2015 . 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 notes.
We conduct 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 exposures to adverse movements in currency exchange rates as the operating 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 the 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
Statements of Operations.
The U.S. Dollar significantly strengthened against the Euro during 2014, moving from an exchange rate of 1.38 U.S. Dollars per Euro as of January 1,
2014 to 1.21 U.S. Dollars per Euro as of December 31, 2014 . The U.S. Dollar has strengthened further in 2015 to an exchange rate of 1.09 U.S. Dollars per Euro
as of December 31, 2015 . The U.S. Dollar also strengthened significantly during this time frame as compared to many other currencies. As a result, our foreign
currency denominated net assets, gross bookings, gross profit, operating expenses and net income have been negatively impacted as expressed in U.S. Dollars.
Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins are not significantly impacted by
currency fluctuations. The aggregate principal value of our Euro-denominated 2022 Notes, 2024 Notes and 2027 Notes, and accrued interest thereon, provide a
natural hedge of the net assets of certain of our Euro functional currency subsidiaries.
From time to time, we enter into foreign exchange derivative contracts to minimize the impact of short-term foreign currency fluctuations in our
consolidated operating results. Our derivative contracts principally address foreign exchange
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