Western Union 2013 Annual Report Download - page 194

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2013 FORM 10-K
84
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from changes in market rates and prices, including changes in foreign currency exchange
rates and interest rates and credit risk related to our agents and customers. A risk management program is in place to manage these
risks.
Foreign Currency Exchange Rates
We provide Consumer-to-Consumer money transfer services in more than 200 countries and territories. We manage foreign
exchange risk through the structure of the business and an active risk management process. We settle with the vast majority of our
agents in United States dollars or euros. However, in certain circumstances, we settle in other currencies. We typically require the
agent to obtain local currency to pay recipients; thus, we generally are not reliant on international currency markets to obtain and
pay illiquid currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are
paid by the next day after they are initiated. To mitigate this risk further, we enter into short duration foreign currency forward
contracts, generally with maturities from a few days up to one month, to offset foreign exchange rate fluctuations between transaction
initiation and settlement. We also have exposure to certain foreign currency denominated cash and other asset positions and may
utilize foreign currency forward contracts, typically with maturities of less than one year at inception, to offset foreign exchange
rate fluctuations on these positions. In certain consumer money transfer and Business Solutions transactions involving different
send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer or
business and the rate at which we or our agents are able to acquire the currency, helping to provide protection against currency
fluctuations. We promptly buy and sell foreign currencies as necessary to cover our net payables and receivables which are
denominated in foreign currencies.
We use longer-term foreign currency forward contracts to mitigate risks associated with changes in foreign currency exchange
rates on Consumer-to-Consumer revenues denominated primarily in the euro, and to a lesser degree the Canadian dollar, British
pound, Swiss franc, Australian dollar, and other currencies. We use contracts with maturities of up to 36 months at inception to
mitigate some of the impact that changes in foreign currency exchange rates could have on forecasted revenues, with a targeted
weighted-average maturity of approximately one year. We believe the use of longer-term foreign currency forward contracts
provides predictability of future cash flows from our international Consumer-to-Consumer operations.
We have additional foreign exchange risk and associated foreign exchange risk management due to the nature of our Business
Solutions business. The majority of this business' revenue is from exchanges of currency at the spot rate enabling customers to
make cross-currency payments. In certain countries, this business also writes foreign currency forward and option contracts for
our customers to facilitate future payments. The duration of these derivative contracts at inception is generally less than one year.
Business Solutions aggregates its foreign exchange exposures arising from customer contracts, including the derivative contracts
described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution
counterparties. The foreign exchange risk is actively managed.