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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
59
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates, interest rates
and equity prices. All of these market risks arise in the normal course of business, as we do not engage in speculative trading
activities. In order to manage the risk arising from these exposures, we utilize a variety of commodity, foreign exchange and
interest rate forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and
further disclosures are provided in note 15 to the consolidated financial statements.
Commodity Price Risk
We are exposed to changes in the prices of refined fuels, principally jet-A, diesel and unleaded gasoline, as well as
changes in the price of natural gas. 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. Additionally, we periodically use a
combination of option, forward and futures contracts to provide partial protection from changing fuel and energy prices. As of
December 31, 2015 and 2014, however, we had no commodity contracts outstanding.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue, operating expenses and financing transactions in currencies other
than the local currencies in which we operate. We are exposed to currency risk from the potential changes in functional
currency values of our foreign currency-denominated assets, liabilities and cash flows. Our most significant foreign currency
exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We use
forwards as well as a combination of purchased and written options to hedge forecasted cash flow currency exposures. These
derivative instruments generally cover forecasted foreign currency exposures for periods of 12 to 48 months. We also utilize
forward contracts to hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency
remeasurement.
Interest Rate Risk
We have issued debt instruments, including debt associated with capital leases, that accrue expense at fixed and floating
rates of interest. We use a combination of 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. We also utilize forward starting swaps and similar instruments to
lock in all or a portion of the borrowing cost of anticipated debt issuances. Our floating rate debt and interest rate swaps subject
us to risk resulting from changes in short-term (primarily LIBOR) interest rates.
We also are subject to interest rate risk with respect to our pension and postretirement benefit obligations, as changes in
interest rates will effectively increase or decrease our liabilities associated with these benefit plans, which also results in
changes to the amount of pension and postretirement benefit expense recognized in future periods.
We have investments in debt securities, as well as cash-equivalent instruments, some of which accrue income at variable
rates of interest. Additionally, we hold a portfolio of finance receivables that accrue income at fixed and floating rates of
interest.
Equity Price Risk
We hold investments in various common equity securities that are subject to price risk.
Sensitivity Analysis
The following analysis provides quantitative information regarding our exposure to foreign currency exchange risk,
interest rate risk and equity price risk embedded in our existing financial instruments. We utilize valuation models to evaluate
the sensitivity of the fair value of financial instruments with exposure to market risk that assume instantaneous, parallel shifts
in exchange rates, interest rate yield curves and commodity and equity prices. For options and instruments with non-linear
returns, models appropriate to the instrument are utilized to determine the impact of market shifts.