Halliburton 2015 Annual Report Download - page 87

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The carrying amount and fair value of our long-term debt is as follows:
December 31, 2015 December 31, 2014
Millions of dollars Level 1 Level 2 Total fair
value
Carrying
value Level 1 Level 2 Total fair
value
Carrying
value
Long-term debt $ 1,009 $ 14,947 $ 15,956 $ 15,346 $ 4,822 $ 4,257 $ 9,079 $ 7,779
Our Level 1 debt fair values are calculated using quoted prices in active markets for identical liabilities with
transactions occurring on the last two days of year-end. Our Level 2 debt fair values are calculated using significant observable
inputs for similar liabilities where estimated values are determined from observable data points on our other bonds and on other
similarly rated corporate debt or from observable data points of transactions occurring prior to two days from year-end and
adjusting for changes in market conditions. Our total fair value and carrying value of debt increased in 2015 compared to 2014
associated with the $7.5 billion debt issuance in November 2015. Additionally, differences between the periods presented in our
Level 1 and Level 2 classification of our long-term debt relate to the timing of when transactions are executed. We have no debt
measured at fair value using unobservable inputs (Level 3).
We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively
manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign
exchange options, and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from
fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The fair value of
our forward contracts, options, and interest rate swaps was not material as of December 31, 2015 or December 31, 2014. The
counterparties to our derivatives are primarily global commercial and investment banks.
Foreign currency exchange risk
We have operations in many international locations and are involved in transactions denominated in currencies other
than the United States dollar, our functional currency, which exposes us to foreign currency exchange rate risk. Techniques in
managing foreign currency exchange risk include, but are not limited to, foreign currency borrowing and investing and the use
of currency exchange instruments. We attempt to selectively manage significant exposures to potential foreign currency
exchange losses based on current market conditions, future operating activities, and the associated cost in relation to the
perceived risk of loss. The purpose of our foreign currency risk management activities is to minimize the risk that our cash
flows from the sale and purchase of services and products in foreign currencies will be adversely affected by changes in
exchange rates.
We use forward contracts and options to manage our exposure to fluctuations in the currencies of certain countries in
which we do business internationally. These instruments are not treated as hedges for accounting purposes, generally have an
expiration date of one year or less, and are not exchange traded. While these instruments are subject to fluctuations in value, the
fluctuations are generally offset by the value of the underlying exposures being managed. The use of some of these instruments
may limit our ability to benefit from favorable fluctuations in foreign currency exchange rates.
Derivatives are not utilized to manage exposures in some currencies due primarily to the lack of available markets or
cost considerations (non-traded currencies). We attempt to manage our working capital position to minimize foreign currency
exposure in non-traded currencies and recognize that pricing for the services and products offered in these countries should
account for the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.
The notional amounts of open foreign exchange derivatives were $619 million at December 31, 2015 and $662 million
at December 31, 2014. The notional amounts of these instruments do not generally represent amounts exchanged by the parties,
and thus are not a measure of our exposure or of the cash requirements related to these contracts. As such, cash flows related to
these contracts are typically not material. The amounts exchanged are calculated by reference to the notional amounts and by
other terms of the contracts, such as exchange rates.
Interest rate risk
We are subject to interest rate risk on our existing long-term debt, debt potentially issued in the future, and some of our
long-term investments in fixed income securities. Our short-term borrowings and short-term investments in fixed income
securities do not give rise to significant interest rate risk due to their short-term nature. We had fixed rate long-term debt
totaling $15.3 billion at December 31, 2015 and $7.8 billion at December 31, 2014, with $659 million maturing during 2016.
We also had $33 million of long-term investments in fixed income securities at December 31, 2015 with maturities that extend
through January 2018.