UPS 2013 Annual Report Download - page 119

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
107
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 designate 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,
British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong 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 also hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency
remeasurement using foreign currency forward contracts. We have designated and account for these contracts as cash flow hedges
of forecasted foreign currency denominated transactions, and therefore the resulting gains and losses from these hedges are
recognized as a component of other operating expense when the underlying transactions are subject to currency remeasurement.
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 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.