Expedia 2010 Annual Report Download - page 63

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that a hypothetical 1.00% (100 basis points) increase in interest rates would have resulted in a decrease in the fair
values of our investments of approximately $2 million as of December 31, 2010. Such losses would only be
realized if we sold the investments prior to maturity.
We did not experience any significant impact from changes in interest rates for the years ended
December 31, 2010, 2009 or 2008.
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 operations.
To the extent practicable, we minimize our foreign currency exposures by maintaining natural hedges
between our current assets and current liabilities in similarly denominated foreign currencies. Additionally,
during 2008, we began using foreign currency forward contracts to economically hedge certain merchant revenue
exposures and in lieu of holding certain foreign currency cash for the purpose of economically hedging our
foreign currency-denominated operating liabilities. These instruments are typically short-term and are recorded at
fair value with gains and losses recorded in other, net. As of December 31, 2010 and 2009, we had a net forward
liability of $1 million recorded in accrued expenses and other current liabilities and a net forward asset of less
than $1 million recorded in prepaid expenses and other current assets. We may enter into additional foreign
exchange derivative contracts or other economic hedges in the future. 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 make a number of estimates in conducting
hedging activities including in some cases the level of future bookings, cancellations, refunds, customer stay
patterns 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 hedges.
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 effectiveness at forecasting and managing,
through balance sheet netting or the use of derivative contracts, 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 $4 million based on our foreign currency forward positions
(excluding the impact of forward positions economically hedging our merchant revenue exposures) and the net
asset or liability balances of our foreign denominated cash and cash equivalents, accounts receivable, deferred
merchant bookings and merchant accounts payable balances as of December 31, 2010. 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 2010, 2009 and 2008, we recorded net foreign exchange rate losses of $18 million ($14 million
excluding the contracts economically hedging our forecasted merchant revenue), $30 million ($20 million
excluding the contracts economically hedging our forecasted merchant revenue), and $47 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.
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