Visa 2014 Annual Report Download - page 75

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential economic loss arising from adverse changes in market factors. Our
exposure to financial market risks results primarily from fluctuations in foreign currency exchange
rates, interest rates and equity prices. Aggregate risk exposures are monitored on an ongoing basis.
Foreign Currency Exchange Rate Risk
Although most of our activities are transacted in U.S. dollars, we are exposed to adverse
fluctuations in foreign currency exchange rates. Risks from foreign currency exchange rate fluctuations
are primarily related to adverse changes in the U.S. dollar value of revenues generated from foreign
currency-denominated transactions and adverse changes in the U.S. dollar value of payments in
foreign currencies, primarily for expenses at our non-U.S. locations. We manage these risks by
entering into foreign currency forward contracts that hedge exposures of the variability in the U.S.
dollar equivalent of anticipated non-U.S. dollar denominated cash flows. Our foreign currency
exchange rate risk management program reduces, but does not entirely eliminate, the impact of foreign
currency exchange rate movements.
The aggregate notional amounts of our foreign currency forward contracts outstanding in our
exchange rate risk management program, including contracts not designated for cash flow hedge
accounting, were $1.3 billion at September 30, 2014 and 2013. The aggregate notional amount
outstanding at September 30, 2014 is fully consistent with our strategy and treasury policy aimed at
reducing foreign exchange risk below a predetermined and approved threshold. However, actual
results could materially differ from our forecast. The effect of a hypothetical 10% change in the value of
the U.S. dollar is estimated to create an additional fair value gain or loss of approximately $90 million
on our foreign currency forward contracts outstanding at September 30, 2014. See Note 1—Summary
of Significant Accounting Policies and Note 12—Derivative Financial Instruments to our consolidated
financial statements.
We are also subject to foreign currency exchange risk in daily settlement activities. This risk arises
from the timing of rate setting for settlement with clients relative to the timing of market trades for
balancing currency positions. Risk in settlement activities is limited through daily operating procedures,
including the utilization of Visa settlement systems and our interaction with foreign exchange trading
counterparties.
Interest Rate Risk
Our investment portfolio assets are held in both fixed-rate and adjustable-rate securities. These
assets are included in cash equivalents and short-term or long-term available-for-sale investments.
Investments in fixed-rate instruments carry a degree of interest rate risk. The fair value of fixed-rate
securities may be adversely impacted due to a rise in interest rates. Additionally, a falling-rate
environment creates reinvestment risk because as securities mature, the proceeds are reinvested at a
lower rate, generating less interest income. Historically, we have been able to hold investments until
maturity. Neither our operating results or cash flows have been, nor are expected to be, materially
impacted by a sudden change in market interest rates.
The fair value balances of our fixed-rate investment securities at September 30, 2014 and 2013
were $3.0 billion and $3.5 billion, respectively. A hypothetical 100 basis point increase or decrease in
interest rates would create an estimated change in fair value of approximately $32 million on our fixed-
rate investment securities at September 30, 2014. The fair value balances of our adjustable-rate debt
securities were $1.9 billion and $1.1 billion at September 30, 2014 and 2013, respectively.
Visa Europe Put Option
We have a liability related to the put option with Visa Europe, which is recorded at fair value at
September 30, 2014. We are required to assess the fair value of the put option on a quarterly basis,
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