Visa 2011 Annual Report Download - page 110

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011
(in millions, except as noted)
Of these amounts, $3.2 billion and $3.0 billion at September 30, 2011 and 2010, respectively, are covered by collateral. The total available collateral balances
presented below are greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeds the
total settlement exposure for certain financial institutions at each date presented.
The Company maintained collateral as follows:
September 30,
2011
September 30,
2010
(in millions)
Cash equivalents $ 931 $ 899
Pledged securities at market value 296 470
Letters of credit 902 869
Guarantees 1,845 1,803
Total $ 3,974 $ 4,041
Cash equivalents collateral is reflected in customer collateral on the consolidated balance sheets as it is held in escrow in the Company's name. All other
collateral is excluded from the consolidated balance sheets. Pledged securities are held by third parties in trust for the Company and clients. Letters of credit
are provided primarily by client financial institutions to serve as irrevocable guarantees of payment. Guarantees are provided primarily by parent financial
institutions to secure the obligations of their subsidiaries, and the Company routinely evaluates the financial viability of institutions providing the guarantees.
The fair value of the settlement risk guarantee is estimated using a proprietary model which considers statistically derived loss factors based on
historical experience, estimated settlement exposures at period end and a standardized grading process for clients (using, where available, third-party
estimates of the probability of customer failure). Historically, the Company experienced minimum losses, which has contributed to an estimated probability-
weighted value of the guarantee of approximately $1 million at September 30, 2011 and 2010, which is reflected in accrued liabilities on the consolidated
balance sheets.
Note 13—Derivative Financial Instruments
The functional currency for the Company is the U.S. dollar ("USD") for the majority of its foreign operations. The Company transacts business in USD
and in various foreign currencies. This activity subjects the Company to exposure from movements in foreign currency exchange rates. The Company's policy
is to enter into foreign exchange forward derivative contracts to manage the variability in expected future cash flows attributable to changes in foreign
exchange rates. At September 30, 2011, all derivative instruments outstanding mature within 12 months or less. The Company does not use foreign exchange
forward contracts for speculative or trading purposes.
The Company enters into forward contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange
rates. Such cash flow exposures result from portions of forecasted revenues and expenses being denominated in or based on currencies other than USD. The
Company's rolling hedge strategy program seeks to reduce the exchange rate risk from forecasted net exposure of revenues derived from and payments made
in foreign currencies during the
109