Expedia 2007 Annual Report Download - page 57

fluctuations in interest rates if, consistent with our practice to date, we do not hedge the interest rate exposure
arising from any borrowings under our revolving credit facility. As of December 31, 2007, our outstanding
borrowing under the revolving credit facility was $585.0 million. No borrowings were outstanding under the
revolving credit facility as of December 31, 2006. A hypothetical 10% increase in market rates would increase
our interest expense by $3.3 million.
We did not experience any significant impact from changes in interest rates for the years ended
December 31, 2007 or 2006.
Foreign Exchange Risk
We conduct business in certain international markets, primarily in Australia, Canada, China and the
European Union. Because we operate in international markets, we have exposure to different economic
climates, political arenas, tax systems and regulations that could affect foreign exchange rates. Our primary
exposure to foreign currency risk relates to transacting in foreign currency and recording the activity in
U.S. dollars. Changes in exchange rates between the U.S. dollar and these other currencies will result in
transaction gains or losses, which we recognize in our consolidated statements of income. To the extent
practicable, we minimize this exposure by maintaining natural hedges between our current assets and current
liabilities in similarly denominated foreign currencies.
Future net transaction gains and losses are inherently difficult to predict as they are reliant on how the
multiple currencies in which we transact fluctuate in relation to the U.S. dollar, the relative composition and
denomination of current assets and liabilities each period, and our ability to maintain natural hedges against
such exposures. As an example, if the foreign currencies in which we hold net asset balances were to all
weaken 10% against the U.S. dollar and foreign currencies in which we hold net liability balances were to all
strengthen 10% against the U.S. dollar, we would recognize foreign exchange losses of approximately
$6.3 million based on the net asset or liability balances of our foreign denominated cash and cash equivalents,
accounts receivable, deferred merchant bookings and merchant payable balances as of December 31, 2007. As
the net composition of these balances fluctuate frequently, even daily, as do foreign exchange rates, the
example loss could be compounded or reduced significantly within a given period.
During 2007, 2006 and 2005 we recorded net foreign exchange rate losses of $22.0 million, net foreign
exchange rate gains of $10.4 million and net foreign exchange rate losses of $0.6 million. As we increase our
operations in international markets, our exposure to fluctuations in foreign currency exchange rates increases.
The economic impact to us of foreign currency exchange rate movements is linked to variability in real
growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause
us to adjust our financing and operating strategies.
As foreign currency exchange rates fluctuate, translation of the income statements of our international
businesses into U.S. dollars affects year-over-year comparability of operating results. Historically, we have not
hedged foreign exchange risks; we periodically review our strategy for hedging foreign exchange risks. Our
goal in managing our foreign exchange risk is to reduce to the extent practicable our potential exposure to the
changes that exchange rates might have on our earnings, cash flows and financial position.
We use cross-currency swaps to hedge against the change in value of certain intercompany loans
denominated in currencies other than the lending subsidiaries’ functional currency. For additional information
about our cross-currency swaps, see Note 7 — Derivative Instruments, in the notes to consolidated financial
statements.
Equity Price Risk
We do not maintain any minority investments in equity securities as part of our marketable securities
investment strategy. Thus, our equity price risk primarily relates to fluctuations in our stock price, which
affects our derivative liabilities related to outstanding Ask Jeeves Notes. We base the fair value of these
derivative instruments primarily on the changes in the market price of our common stock.
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