Western Union 2013 Annual Report Download - page 195

2013 FORM 10-K
85
As of December 31, 2013 and 2012, 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 $41 million and $34 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, 2013 of $3.7 billion. Approximately
$2.8 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.
The significant majority 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.
As of December 31, 2013, we had $250.0 million of floating notes, which had an effective interest rate of 1.2% or 1% above
three-month LIBOR. Additionally, $1,550.0 million of our fixed-rate borrowings at par value are effectively floating rate debt
through interest rate swap agreements, changing this fixed-rate debt to LIBOR-based floating rate debt, with weighted-average
spreads of approximately 300 basis points above LIBOR.
We review our overall exposure to floating and fixed rates by evaluating our net asset or liability position in each, 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 decision regarding 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. As of December 31, 2013, our
weighted-average effective rate on total borrowings was approximately 4.6%.
A hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to pre-tax income of
approximately $18 million and $11 million annually based on borrowings on December 31, 2013 and 2012, respectively, that are
sensitive to interest rate fluctuations. The same 100 basis point increase/decrease in interest rates, if applied to our cash and
investment balances on December 31, 2013 and 2012 that are sensitive to interest rate fluctuations, would result in an offsetting
benefit/reduction to pre-tax income of approximately $28 million and $21 million annually, respectively. There are inherent
limitations in the sensitivity analysis presented, primarily due to the assumption that interest rate changes would be instantaneous.
As a result, the analysis is unable to reflect the potential effects of more complex market changes, including changes in credit risk
regarding our investments, which may positively or negatively affect income. In addition, the current mix of fixed versus floating
rate debt and investments and the level of assets and liabilities will change over time. We will also be further impacted by changes
to future interest rates as we refinance our debt or by reinvesting proceeds from the sale or maturity of our investments.