Western Union 2014 Annual Report Download - page 224

2014 FORM 10-K
86
As of December 31, 2014, a hypothetical uniform 10% strengthening or weakening in the value of the United States dollar
relative to all other currencies in which our net income is generated would have resulted in a decrease/increase to pre-tax annual
income of approximately $25 million, based on our forecast of Consumer-to-Consumer unhedged exposure to foreign currency
at that date. 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, 2014 of $3.3 billion. Approximately
$2.5 billion of these assets bear interest at floating rates and are therefore sensitive to changes in interest rates. These assets
primarily include cash in banks, money market instruments, 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 majority of the remainder of our interest-bearing assets consist of highly-rated state and municipal debt securities which
are fixed rate term notes. These investments may include investments made from cash received from our money order services,
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, 2014, we had $250.0 million of floating rate notes, which had an effective interest rate of 1.2% or 1%
above three-month LIBOR. Additionally, $975.0 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 200 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, 2014, our
weighted-average effective rate on total borrowings was approximately 4.4%.
A hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to pre-tax income of
approximately $12 million and $18 million annually based on borrowings, net of the impact of hedges on December 31, 2014 and
2013, 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, 2014 and 2013 that are sensitive to interest rate fluctuations, would
result in an annual benefit/reduction to pre-tax income of approximately $25 million and $28 million, 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.