Western Union 2011 Annual Report Download - page 88

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 impact 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.
We have additional foreign exchange risk and associated foreign exchange risk management due to the nature
of our Western Union Business Solutions (“Business Solutions”) business, which includes our Travelex Global
Business Payments business (“TGBP”), which was acquired in November 2011. The significant majority of this
business’ revenue is from exchanges of currency at the spot rate enabling customers to make cross-currency
payments. In certain countries, 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. Business Solutions 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.
As of December 31, 2011 and 2010, 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 $33 million and $32 million, respectively, based on
our forecast of consumer-to-consumer unhedged exposure to foreign currency at those dates. 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 as of December 31, 2011 of
$2.7 billion. Approximately $1.8 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 municipal variable
rate securities and are included in our Consolidated Balance Sheets within “Cash and cash equivalents” and
“Settlement assets.” To the extent these assets are held in connection with money transfers and other related
payment services awaiting redemption, they are classified as “Settlement assets.” Earnings on these investments
will increase and decrease with changes in the underlying short-term interest rates.
Substantially all of the remainder of our interest-bearing assets consist of highly-rated state and municipal debt
securities, the majority of which are fixed-rate instruments. These investments may include investments made
from cash received from our money transfer business and other related payment services awaiting redemption
classified within “Settlement assets” in the Consolidated Balance Sheets. As interest rates rise, the fair value of
these fixed-rate interest-bearing securities will decrease; conversely, a decrease to interest rates would result in
an increase to the fair values of the securities. We have classified these investments as available-for-sale within
“Settlement assets” in the Consolidated Balance Sheets, and accordingly, recorded these instruments at their fair
value with the net unrealized gains and losses, net of the applicable deferred income tax effect, being added to or
deducted from our “Total stockholders’ equity” on our Consolidated Balance Sheets.
81