Avis 2012 Annual Report Download - page 52

Download and view the complete annual report

Please find page 52 of the 2012 Avis annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 129

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129

45
We are exposed to a variety of market risks, including changes in currency exchange rates, interest rates and gasoline prices.
The acquisition of Avis Europe in 2011 increased our currency exchange risks. We manage our exposure to market risks
through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial
instruments, particularly swap contracts, futures and options contracts, to manage and reduce the interest rate risk related to
our debt; currency forwards to manage and reduce currency exchange rate risk; and derivative commodity instruments to
manage and reduce the risk of changing unleaded gasoline prices.
We are exclusively an end user of these instruments. We do not engage in trading, market-making or other speculative
activities in the derivatives markets. We manage our exposure to counterparty credit risk related to our use of derivatives
through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of
credit risk. Our counterparties are substantial investment and commercial banks with significant experience providing such
derivative instruments.
Our total market risk is influenced by a wide variety of factors including the volatility present within the markets and the
liquidity of the markets. There are certain limitations inherent in the sensitivity analyses discussed below. These “shock
tests” are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and
the inability to include the complex market reactions that normally would arise from the market shifts modeled. For
additional information regarding our borrowings and financial instruments, see Notes 14, 15 and 20 to our Consolidated
Financial Statements.
Currency Risk Management
We have currency rate exposure to exchange rate fluctuations worldwide and particularly with respect to the Australian
dollar, British pound sterling, Canadian dollar, Euro and New Zealand dollar. We use currency forward contracts and
currency swaps to manage currency exchange risk that arises from certain intercompany transactions and from non-functional
currency denominated assets and liabilities and earnings denominated in non-U.S. dollar currencies. Our currency forward
contracts are often not designated as hedges and therefore changes in the fair value of these derivatives are recognized in
earnings as they occur. We anticipate that such currency exchange rate risk will remain a market risk exposure for the
foreseeable future.
We assess our market risk based on changes in currency exchange rates utilizing a sensitivity analysis. The sensitivity
analysis measures the potential impact on earnings, cash flows and fair values based on a hypothetical 10% appreciation or
depreciation in the value of the underlying currencies being hedged, against the U.S. dollar at December 31, 2012. With all
other variables held constant, a hypothetical 10% change (increase or decrease) in currency exchange rates would not have a
material impact on our earnings at December 31, 2012. Because unrealized gains or losses related to foreign currency forward
and swap contracts are expected to be offset by corresponding gains or losses on the underlying exposures being hedged,
when combined, these foreign currency contracts and the offsetting underlying commitments do not create a material impact
on our Consolidated Financial Statements.
Interest Rate Risk Management
Our primary interest rate exposure at December 31, 2012 was interest rate fluctuations in the United States, specifically
LIBOR and commercial paper interest rates due to their impact on variable rate borrowings and other interest rate sensitive
liabilities. We use interest rate swaps and caps to manage our exposure to interest rate movements. We anticipate that LIBOR
and commercial paper rates will remain a primary market risk exposure for the foreseeable future.
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. Based on our interest rate
derivatives as of December 31, 2012, we estimate that a 10% change in interest rates would not have a material impact on our
earnings. Because gains or losses related to interest rate derivatives are expected to be offset by corresponding gains or losses
on the underlying exposures being hedged, when combined, these interest rate contracts and the offsetting underlying
commitments do not create a material impact on our Consolidated Financial Statements.
Commodity Risk Management
We have commodity price exposure related to fluctuations in the price of unleaded gasoline. We anticipate that such
commodity risk will remain a market risk exposure for the foreseeable future. We determined that a hypothetical 10% change
in the price of unleaded gasoline would not have a material impact on our earnings at December 31, 2012.