UPS 2009 Annual Report Download - page 114

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are
the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into
option contracts on energy commodity products to manage the price risk associated with forecasted transactions
involving refined fuels, principally jet-A, diesel, and unleaded gasoline. The objective of the hedges is to reduce
the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving
those products. We have designated and account for these contracts as cash flow hedges of the underlying
forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these
hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international
package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign
currency exposures relate to the Euro, the British Pound Sterling, and the Canadian Dollar. We hedge portions of
our forecasted revenue denominated in foreign currencies with option contracts. We have designated and account
for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the
resulting gains and losses from these hedges are recognized as a component of international package revenue
when the underlying sales transactions occur.
We have foreign currency denominated debt obligations and capital lease obligations associated with our
aircraft. For some of these debt obligations and leases, we hedge the foreign currency denominated contractual
payments using cross-currency interest rate swaps, which effectively convert the foreign currency denominated
contractual payments into U.S. Dollar denominated payments. We have designated and account for these swaps
as cash flow hedges of the forecasted contractual payments and, therefore, the resulting gains and losses from
these hedges are recognized in the income statement when the currency remeasurement gains and losses on the
underlying debt obligations and leases are incurred.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination
of derivative instruments, including interest rate swaps and cross-currency interest rate swaps, as part of our
program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of
borrowing. The notional amount, interest payment, and maturity dates of the swaps match the terms of the
associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within
our capital structure.
We have designated and account for interest rate swaps that convert fixed rate interest payments into
floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains
and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the
associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We
have designated and account for interest rate swaps that convert floating rate interest payments into fixed rate
interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from
fair value adjustments to the interest rate swap are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt
offerings, using forward starting interest rate swaps, interest rate locks, or similar derivatives. These agreements
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