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70
WESTERN UNION 2007 Annual Report
The Company does not believe its derivative fi nancial instru-
ments expose it to more than a nominal amount of credit risk as
the counterparties are established, well-capitalized fi nancial
institutions with credit ratings of “A” or better from major rating
agencies. The credit risk inherent in these agreements represents
the possibility that a loss may occur from the nonperformance
of a counterparty to the agreements. The Company performs a
review of the credit risk of these counterparties at the inception
of the hedge, on a quarterly basis and as circumstances warrant.
The Company also monitors the concentration of its contracts
with any individual counterparty. The Company anticipates that
the counterparties will be able to fully satisfy their obligations
under the agreements. The Company’s foreign currency exposures
are in liquid currencies, consequently there is minimal risk that
appropriate derivatives to maintain the hedging program would
not be available in the future.
The details of each designated hedging relationship are
formally documented at the inception of the arrangement, includ-
ing the risk management objective, hedging strategy, hedged
item, specifi c risks being hedged, the derivative instrument, how
effectiveness is being assessed and how ineffectiveness, if any,
will be measured. The derivative must be highly effective in offset-
ting the changes in cash fl ows, and effectiveness is evaluated
quarterly on a retrospective and prospective basis.
Foreign Currency Hedging
The Company assesses the effectiveness of its foreign currency
forward contracts, used to mitigate some of the risks related to
forecasted revenues, based on changes in the spot rate of the
affected currencies during the period of designation. Accordingly,
all changes in the fair value of the hedges not considered effective
are recognized immediately in “Derivative gains/(losses), net”
within the Company’s Consolidated Statements of Income.
Differences between changes in the forward rates and spot rates,
along with all changes in the fair value during periods in which
the instrument was not designated as a hedge, were excluded
from the measure of effectiveness. Prior to September 29, 2006,
the Company did not have derivatives that qualifi ed for hedge
accounting in accordance with SFAS No. 133. As such, the effect
of the changes in the fair value of these hedges prior to September
29, 2006 is included in “Derivative gains/(losses), net”. On Sept-
ember 29, 2006 and during the fourth quarter of 2006, the
Company entered into new derivative contracts in accordance
with its revised foreign currency derivatives and hedging pro-
cesses, which were designated and qualify as cash fl ow hedges
under SFAS No. 133.
As mentioned above, the Company also uses short duration
foreign currency forward contracts, generally with maturities from
a few days up to three weeks, to offset foreign exchange rate
fl uctuations on settlement assets and obligations between initia-
tion and settlement. In addition, forward contracts, typically with
maturities of less than one year, are utilized to offset foreign
exchange rate fl uctuations on certain foreign currency denomi-
nated cash positions. None of these contracts are designated as
hedges pursuant to SFAS No. 133.
The aggregate United States dollar equivalent notional amount of foreign currency forward contracts held by the Company with
external third parties as of the balance sheet dates are as follows (in millions):
December 31, 2007 2006
Contracts not designated as hedges:
Euro $358.9 $249.5
British pound 56.4 43.5
Other 46.4 51.1
Contracts designated as hedges:
Euro 585.3 333.9
British pound 99.2 73.2
Canadian dollar 97.5 —
Interest Rate Hedging
In October 2006, the Company executed forward starting interest
rate swaps with a combined notional amount of $875 million to
fi x the interest rate in connection with an anticipated issuance
of fi xed rate debt securities expected to be issued between
October 2006 and May 2007. The Company designated these
derivatives as cash fl ow hedges of the variability in the cash
outfl ows of interest payments on the fi rst $875 million of the
forecasted debt issuance due to changes in the benchmark
interest rate. The swaps were expected to be highly effective in
hedging the interest payments associated with the forecasted
debt issuance as the terms of the hedges, including the life and
notional amount, mirrored the probable issuance dates of the
forecasted debt issuances, and statistical analyses of historical
relationships indicated a high correlation between spot and
forward swap rates for all possible issuance dates within the
expected range of issuance dates.