Western Union 2009 Annual Report Download - page 83

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from changes in market rates and prices, including changes in
foreign currency exchange rates and interest rates and credit risk related to our agents and customers. A risk
management program is in place to manage these risks.
Foreign Currency Exchange Rates
We provide consumer-to-consumer money transfer services in more than 200 countries and territories. We
manage foreign exchange risk through the structure of the business and an active risk management process.
We settle with the vast majority of our agents in United States dollars or euros. However, in certain
circumstances, we settle in other currencies. We typically require the agent to obtain local currency to pay
recipients; thus, we generally are not reliant on international currency markets to obtain and pay illiquid
currencies. The foreign currency exposure that does exist is limited by the fact that the majority of
transactions are paid within 24 hours after they are initiated. To mitigate this risk further, we enter into short-
term foreign currency forward contracts, generally with maturities from a few days up to one month, to offset
foreign exchange rate fluctuations between transaction initiation and settlement. We also utilize foreign
currency forward contracts, typically with terms of less than one year at inception, to offset foreign exchange
rate fluctuations on certain foreign currency denominated cash positions and intercompany loans. In certain
consumer money transfer and global business payments transactions involving different send and receive
currencies, we generate revenue based on the difference between the exchange rate set by us to the customer
and the rate at which we or our agents are able to acquire currency, helping to provide protection against
currency fluctuations. We promptly buy and sell foreign currencies as necessary to cover our net payables and
receivables which are denominated in foreign currencies.
We use longer-term foreign currency forward contracts to mitigate risks associated with changes in
foreign currency exchange rates on consumer-to-consumer revenues denominated primarily in the euro, and to
a lesser degree the British pound, Canadian dollar and other currencies. We use contracts with maturities of up
to 36 months at inception to mitigate some of the risk that changes in foreign currency exchange rates could
have on forecasted revenues, with a targeted weighted-average maturity of approximately one year. We believe
the use of longer-term foreign currency forward contracts provides predictability of future cash flows from our
international consumer-to-consumer operations.
With the acquisition of Custom House in the third quarter of 2009, our foreign exchange risk and
associated foreign exchange risk management has increased due to the nature of this business. The significant
majority of Custom House’s revenue is from exchanges of currency at the spot rate enabling customers to
make cross-currency payments. This business also writes foreign currency forward and option contracts for our
customers to facilitate future payments. The duration of these derivatives contracts is generally nine months or
less. Custom House aggregates its foreign exchange exposures arising from customer contracts, including the
derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting
contracts with established financial institution counterparties. The foreign exchange risk is actively managed.
At December 31, 2009 and 2008, a hypothetical uniform 10% strengthening or weakening in the value of
the United States dollar relative to all other currencies in which our profits are generated would have resulted
in a decrease/increase to pre-tax annual income of approximately $27 million and $24 million, respectively,
based on our forecast of consumer-to-consumer unhedged 2010 exposure to foreign currency. There are
inherent limitations in this sensitivity analysis, primarily due to the assumption that foreign exchange rate
movements are linear and instantaneous, that the unhedged exposure is static, and that we would not hedge
any additional exposure. As a result, the analysis is unable to reflect the potential effects of more complex
market changes that could arise, which may positively or negatively affect income.
Interest Rates
We invest in several types of interest bearing assets, with a total value at December 31, 2009 of
$2.7 billion. Approximately $2.0 billion of these assets bear interest at floating rates and are therefore
sensitive to changes in interest rates. These assets primarily include money market funds and state and
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