Financial risk and Hedging Strategy by Verizon Wireless

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  • 1. Financial Risk Management by Verizon SAURABH BARNWAL,Date – 01/01/2013 MPE 4TH BATCH, NMIMS
  • 2. Market RiskVerizon is exposed to various types of market risk in the normalcourse of business, including the impact of interest ratechanges, foreign currency exchange rate fluctuations, changes ininvestment, equity and commodity prices and changes incorporate tax rates. Verizon employ risk managementstrategies, which may include the use of a variety of derivativesincluding cross currency swaps, foreign currency and prepaidforwards and collars, interest rate and commodity swapagreements and interest rate locks. Verizon do not hold derivativesfor trading purposes.
  • 3. Interest Rate RiskVerizon is exposed to changes in interest rates, primarily on itsshort-term debt and the portion of long-term debt that carriesfloating interest rates. The impact of a 100 basis point change ininterest rates affecting Verizon’s floating rate debt would result ina change in annual interest expense, including Verizon’s interestrate swap agreements that are designated as hedges, ofapproximately $0.1 billion. The interest rates on Verizon’s existinglong-term debt obligations are unaffected by changes to itscredit ratings.
  • 4. Sensitivity analysis of the estimated fair values Fair Value Fair Value Fair Value assuming +100 assuming -100 basis point shift basis point shift Long-term debtAt December 31, and related $ 61,870 $ 58,117 $ 66,326 2011 derivatives Long-term debtAt December 31, and related $ 58,591 $ 55,427 $ 62,247 2010 derivatives
  • 5. Interest Rate SwapsVerizon have entered into domestic interest rate swaps to achieve atargeted mix of fixed and variable rate debt. Verizon principally receive fixedrates and pay variable rates based on LIBOR, resulting in a net increase ordecrease to Interest expense. These swaps are designated as fair valuehedges and hedge against changes in the fair value of our debt portfolio.Verizon record the interest rate swaps at fair value on its consolidatedbalance sheets as assets and liabilities. Changes in the fair value of theinterest rate swaps due to changes in interest rates are recorded to Interestexpense, which are offset by changes in the fair value of the debt. The fairvalue of these contracts was $0.6 billion at December 31, 2011 and $0.3billion at December 31, 2010 and is primarily included in Other assets andLong-term debt. As of December 31, 2011, the total notional amount of theseinterest rate swaps was $7.0 billion.
  • 6. Foreign Currency TranslationThe functional currency of Verizon’s foreign operations is primarily the localcurrency. The translation of income statement and balance sheet amountsof Verizon’s foreign operations into U.S. dollars is recorded as cumulativetranslation adjustments, which are included in Accumulated othercomprehensive loss in Verizon’s consolidated balance sheets. Gains andlosses on foreign currency transactions are recorded in the consolidatedstatements of income in Other income and (expense), net. At December 31,2011, Verizon’s primary translation exposure was to the British Pound Sterling,the Euro and the Australian Dollar.
  • 7. Cross Currency SwapsDuring 2008, Verizon Wireless entered into cross currency swaps designated ascash flow hedges to exchange approximately $2.4 billion of British PoundSterling and Euro-denominated debt into U.S. dollars and to fix its futureinterest and principal payments in U.S. dollars, as well as mitigate the impactof foreign currency transaction gains or losses. During December 2011,Verizon repaid $0.9 billion upon maturity for the €0.7 billion of 7.625% VerizonWireless Notes. The settlement of the related cross currency swap did nothave a material impact on our financial statements. The fair value of theoutstanding swaps, primarily included in Other assets, was approximately $0.1billion at December 31, 2011 and December 31, 2010, respectively.
  • 8. Thanks You