UPS 2009 Annual Report Download - page 62

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Equity Price Risk
We hold investments in various common equity securities that are subject to price risk. These securities are
primarily in the form of equity index funds.
Credit Risk
The forward contracts, swaps, and options previously discussed contain an element of risk that the
counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures
for these instruments by limiting the counterparties to financial institutions that meet established credit
guidelines. We do not expect to incur any material losses as a result of counterparty default.
Sensitivity Analysis
The following analysis provides quantitative information regarding our exposure to commodity price risk,
foreign currency exchange risk, interest rate risk, and equity price risk embedded in our existing financial
instruments. We utilize valuation models to evaluate the sensitivity of the fair value of financial instruments with
exposure to market risk that assume instantaneous, parallel shifts in exchange rates, interest rate yield curves, and
commodity and equity prices. For options and instruments with non-linear returns, models appropriate to the
instrument are utilized to determine the impact of market shifts.
There are certain limitations inherent in the sensitivity analyses presented, primarily due to the assumption
that exchange rates change in a parallel fashion and that interest rates change instantaneously. In addition, the
analyses are unable to reflect the complex market reactions that normally would arise from the market shifts
modeled. While this is our best estimate of the impact of the specified interest rate scenarios, these estimates
should not be viewed as forecasts. We adjust the fixed and floating interest rate mix of our interest rate sensitive
assets and liabilities in response to changes in market conditions. Additionally, changes in the fair value of
foreign currency derivatives and commodity derivatives are offset by changes in the cash flows of the underlying
hedged foreign currency and commodity transactions.
(amounts in millions)
Shock-Test Result
2009 2008
Change in Fair Value:
Currency Derivatives(1) ....................................... $(16) $(239)
Change in Annual Expense:
Variable Rate Debt(2) ......................................... $14 $ 39
Interest Rate Derivatives(2) ..................................... $38 $ 2
(1) The potential change in fair value from a hypothetical 10% weakening of the U.S. Dollar against local
currency exchange rates across all maturities.
(2) The potential change in annual interest expense resulting from a hypothetical 100 basis point increase in
short-term interest rates, applied to our variable rate debt and swap instruments (excluding hedges of
anticipated debt issuances).
The sensitivity of our pension and postretirement benefit obligations to changes in interest rates is quantified
in “Critical Accounting Policies and Estimates”. The sensitivity in the fair value and interest income of our
marketable securities due to changes in equity prices and interest rates, respectively, was not material as of
December 31, 2009 or 2008. The sensitivity in the fair value and interest income of our finance receivables due
to changes in interest rates was also not material as of December 31, 2009 or 2008.
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