UPS 2011 Annual Report Download - page 129

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 statements of consolidated income 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
effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the
date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest
expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon
settlement is amortized as an adjustment to the effective interest yield on the debt.
Outstanding Positions
The notional amounts of our outstanding derivative positions were as follows:
December 31, 2011
Notional Value
December 31, 2010
Notional Value
Currency Hedges:
Euro ....................................... €1,685 €1,732
British Pound Sterling ......................... £ 870 £ 871
Canadian Dollar .............................. C$ 318 C$ 289
Interest Rate Hedges:
Fixed to Floating Interest Rate Swaps ............. $ 6,424 $ 6,000
Floating to Fixed Interest Rate Swaps ............. $ 791 $ 53
As of December 31, 2011, we had no outstanding commodity hedge positions. The maximum term over
which we are hedging exposures to the variability of cash flow is 39 years.
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