AT&T Wireless 2010 Annual Report Download - page 55

AT&T Inc. 53
Following are our interest rate derivatives subject to material
interest rate risk as of December 31, 2010. The interest rates
illustrated below refer to the average rates we expect to pay
based on current and implied forward rates and the average
rates we expect to receive based on derivative contracts.
The notional amount is the principal amount of the debt
subject to the interest rate swap contracts. The fair value
asset (liability) represents the amount we would receive (pay)
if we had exited the contracts as of December 31, 2010.
In anticipation of other foreign currency-denominated
transactions, we often enter into foreign exchange forward
contracts to provide currency at a fixed rate. Our policy is
to measure the risk of adverse currency fluctuations by
calculating the potential dollar losses resulting from changes
in exchange rates that have a reasonable probability of
occurring. We cover the exposure that results from changes
that exceed acceptable amounts.
For the purpose of assessing specific risks, we use a sensitivity
analysis to determine the effects that market risk exposures
may have on the fair value of our financial instruments and
results of operations. To perform the sensitivity analysis, we
assess the risk of loss in fair values from the effect of a
hypothetical 10% depreciation of the U.S. dollar against
foreign currencies from the prevailing foreign currency
exchange rates, assuming no change in interest rates.
For foreign exchange forward contracts outstanding at
December 31, 2010, the change in fair value was immaterial.
Furthermore, because our foreign exchange contracts are
entered into for hedging purposes, we believe that these
losses would be largely offset by gains on the underlying
transactions.
All our foreign-denominated debt has been swapped from
fixed-rate foreign currencies to fixed-rate U.S. dollars at
issuance through cross-currency swaps, removing interest
rate risk and foreign currency exchange risk associated with
the underlying interest and principal payments. Likewise,
periodically we enter into interest rate locks to partially hedge
the risk of increases in the benchmark interest rate during the
period leading up to the probable issuance of fixed-rate debt.
We expect gains or losses in our cross-currency swaps and
interest rate locks to offset the losses and gains in the
financial instruments they hedge.
Foreign Exchange Risk
We are exposed to foreign currency exchange risk through our
foreign affiliates and equity investments in foreign companies.
We do not hedge foreign currency translation risk in the net
assets and income we report from these sources. However,
we do hedge a large portion of the exchange risk involved in
anticipation of highly probable foreign currency-denominated
transactions and cash flow streams, such as those related to
issuing foreign-denominated debt, receiving dividends from
foreign investments, and other receipts and disbursements.
Through cross-currency swaps, all our foreign-denominated
debt has been swapped from fixed-rate foreign currencies
to fixed-rate U.S. dollars at issuance, removing interest rate
risk and foreign currency exchange risk associated with the
underlying interest and principal payments. We expect gains
or losses in our cross-currency swaps to offset the losses
and gains in the financial instruments they hedge.
Maturity
Fair Value
2011 2012 2013 2014 2015 Thereafter Total 12/31/10
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional
Amount Maturing $3,000 $3,050 $3,000 $1,000 — $1,000 $11,050 $537
Weighted-Average Variable Rate Payable1 2.8% 3.4% 5.0% 4.8% 5.4% 5.9%
Weighted-Average Fixed Rate Receivable 5.7% 5.5% 5.7% 5.6% 5.6% 5.6%
1Interest payable based on current and implied forward rates for One, Three or Six Month LIBOR plus a spread ranging between approximately 36 and 576 basis points.