Expedia 2008 Annual Report Download - page 25

We have foreign exchange risk.
We conduct a significant and growing portion of our business outside the United States. As a result, we
face exposure to movements in currency exchange rates, particularly those related to the British pound sterling,
the euro, Canadian dollar, Australian dollar and Chinese renminbi.
These exposures include but are not limited to re-measurement gains and losses from changes in the value
of foreign denominated assets and liabilities; translation gains and losses on foreign subsidiary financial results
that are translated into U.S. dollars upon consolidation; fluctuations in merchant hotel revenue due to relative
currency movements from the time of booking to the time of stay; planning risk related to changes in
exchange rates between the time we prepare our annual and quarterly forecasts and when actual results occur;
and the impact of relative exchange rate movements on cross-border travel, principally Europe to the
United States and the United States to Europe travel.
Depending on the size of the exposures and the relative movements of exchange rates, if we choose not
to hedge or fail to hedge effectively our exposure, we could experience a material adverse effect on our
financial statements and financial condition. In addition, given the recent severe volatility in exchange rates
these exposures have increased, and the impact on our results of operations has become more pronounced. In
addition, the current environment, and the increasingly global nature of our business has made hedging these
exposures both more complex and costly. We have increased and plan to continue increasing the scope and
complexity of our foreign exchange risk management, including the use of forward contracts to hedge a
portion of our exposures. We make a number of estimates in conducting hedging activities including in some
cases the level of future bookings, cancellations, refunds and payments in foreign currencies. In the event
those estimates differ significantly from actual results, we could experience greater volatility as a result of our
hedging activities.
We are exposed to various counterparty risks.
We are exposed to the risk of failure to perform by various financial counterparties, including for our
insurance coverages, investments, bank deposits, letters of credit and foreign exchange risk management. As it
relates to foreign exchange, we employ forward contracts to hedge a portion of our exposure to foreign
currency exchange rate fluctuations. As of December 31, 2008, we were party to forward contracts with a
notional value of $165 million and the fair value of which was a $1 million liability. The counterparties to
these contracts were Goldman Sachs, Banc of America, HSBC and Fifth Third Bank. Upon the maturity of
these or subsequent contracts, the counterparties are potentially obligated to pay us net settlement values. If
any of these counterparties were to liquidate, declare bankruptcy or otherwise cease operations, it may not be
able to satisfy its obligations under these forward contracts. In addition, due to the weakening economy we
also face increased credit risk and payment delays from our non-financial contract counterparties.
Our investment in eLong creates risks and uncertainties relating to the laws in China.
The success of our investment in eLong, Inc., a company organized under Cayman Islands law, whose
principal business is the operation of an internet-based travel business in China, is subject to risks and
uncertainties regarding the interpretation of China’s laws and regulations. Significant uncertainties exist in the
interpretation and enforcement of Chinese laws and regulations, and such uncertainties could limit the
available legal protections relating to our investment in eLong. Moreover, we cannot predict the effect of
future developments in China’s legal system, particularly with respect to the travel industry, the internet,
foreign investment or licensing, including the introduction of new laws, changes to existing laws or the
interpretation or enforcement of current or future laws and regulations. In addition, the laws and regulations of
China restrict certain direct foreign investment in the air-ticketing, travel agency and internet content provision
businesses. Although we have established effective control through a series of agreements between eLong, Inc.
and its affiliated Chinese entities, future developments in the interpretation or enforcement of Chinese laws
and regulations or a dispute relating to the agreements could restrict our ability to operate or restructure these
entities or to engage in desirable strategic transactions. Finally, China does not have treaties with the
United States or most other western countries providing for the reciprocal recognition and enforcement of
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