Western Union 2012 Annual Report Download - page 19

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14
Risk Management
Our Company has a credit risk management department that evaluates and monitors our agent-related credit and fraud risks.
We are exposed to credit risk related to receivable balances from agents in the money transfer, walk-in bill payment and money
order settlement process. We also are exposed to credit risk directly from consumer transactions particularly through our online
services and electronic Consumer-to-Business payment channels, where transactions are originated through means other than cash,
and may therefore be subject to “chargebacks,” insufficient funds, or other collection impediments, such as fraud. Our credit risk
management team performs a credit review before each agent signing and conducts periodic analyses.
We are exposed to credit risk in our Business Solutions business relating to: (a) derivatives written by us to our customers
and (b) receivables from certain customers for which beneficiaries are paid prior to receiving cleared funds from the customer,
where we have offered “trade credit.” For the derivatives, the duration of these contracts at inception is generally less than one
year. The credit risk associated with our derivative contracts increases when foreign currency exchange rates move against our
customers, possibly impacting their ability to honor their obligations to deliver currency to us or to maintain appropriate collateral
with us. For those receivables where we have offered trade credit, collection ordinarily occurs within a few days. To mitigate risk,
we perform credit reviews of the customer on an ongoing basis, and, for our derivatives, we may require certain customers to post
collateral or increase collateral based on the fair value of the customer's contract and their risk profile.
To manage our exposures to credit risk with respect to investment securities, money market fund investments and other credit
risk exposures resulting from our relationships with banks and financial institutions, we regularly review investment concentrations,
trading levels, credit spreads and credit ratings, and we attempt to diversify our investments among global financial institutions.
A key component of the Western Union business model is our ability to manage financial risk associated with conducting
transactions worldwide. We settle accounts with the majority of our agents in United States dollars or euros. We utilize foreign
currency exchange contracts, primarily forward contracts, to mitigate the risks associated with currency fluctuations and to provide
predictability of future cash flows. Limited foreign currency risk arises with respect to the agent settlement process because the
majority of money transfer transactions are paid within 24 hours after they are initiated and agent settlements occur within a few
days in most instances. We have additional foreign exchange risk and associated foreign exchange risk management due to the
nature of our Business Solutions business. The majority of this business' revenue is from exchanges of currency at the spot rate
enabling customers to make cross-currency payments. 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.
Our financial results may fluctuate due to changes in interest rates. We review our overall exposure to floating and fixed rates
by evaluating our net asset or liability position in each, while also considering the duration of the individual positions. We manage
this mix of fixed versus floating exposure in an attempt to minimize risk, reduce costs and improve returns. Our exposure to interest
rates can be modified by changing the mix of our interest-bearing assets, as well as adjusting the mix of fixed versus floating rate
debt. The latter is accomplished primarily through the use of interest rate swaps and the terms of any new debt issuances (i.e.,
fixed versus floating). We use interest rate swaps designated as hedges to increase the percentage of floating rate debt, subject to
market conditions.