Western Union 2012 Annual Report Download - page 83

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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. In certain consumer money
transfer and Business Solutions transactions involving different send and receive currencies, we generate revenue based on the
difference between the exchange rate set by us to the consumer or business and the rate at which we or our agents are able to
acquire the 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 Canadian dollar, British
pound, Australian 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 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. In certain countries, this business also writes foreign currency forward and option contracts for
our customers to facilitate future payments. The duration of these derivative contracts at inception is generally less than one year.
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, 2012 and 2011, 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 $34 million and $33 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, 2012 of $3.1 billion. Approximately
$2.1 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
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.