Western Union 2015 Annual Report Download - page 188

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As of both December 31, 2015 and 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, 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 following
assumptions: (a) that foreign exchange rate movements are linear and instantaneous, (b) that fixed exchange rates between certain
currency pairs are retained, (c) that the unhedged exposure is static, and (d) 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, 2015 of $2.7 billion. Approximately
$1.9 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 remainder of our interest bearing assets primarily consists 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.
$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, 2015, our
weighted-average effective rate on total borrowings was approximately 4.8%.
A hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to pre-tax income of
approximately $10 million and $12 million annually based on borrowings, net of the impact of hedges, on December 31, 2015
and 2014, 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, 2015 and 2014 that are sensitive to interest rate fluctuations,
would result in an offsetting increase/decrease to annual pre-tax income of approximately $19 million and $25 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.
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