Yahoo 2012 Annual Report Download - page 75

Our objective is to identify material foreign currency exposures and to manage these exposures to minimize the
potential effects of currency fluctuations on our reported consolidated cash flow and results of operations. We
had net realized and unrealized foreign currency transaction losses of $1 million for the year ended December 31,
2012. Our net realized and unrealized foreign currency transaction gains were $9 million and $13 million for the
years ended December 31, 2011 and 2010, respectively.
We categorize our foreign currency exposure as follows: 1) net investment, 2) balance sheet, and 3) translation.
Net Investment Exposure. In December 2012, we began hedging, on an after-tax basis, our net investment in
Yahoo Japan with forward contracts to reduce the risk that our investment in Yahoo Japan will be adversely
affected by foreign currency exchange rate fluctuations. The forward contracts have maturities ranging from 9 to
15 months. If the Japanese yen appreciates at maturity from the forward contract execution rates, the forward
contracts will require us to pay a cash settlement, which may be material. If the Japanese yen depreciates at
maturity from the forward contract execution rates, we will receive a cash settlement, which may be material. We
have elected to apply net investment hedge accounting and expect the hedges to be effective, allowing changes in
fair value of the derivative instrument to be recorded in accumulated other comprehensive income on our
consolidated balance sheet. The notional amounts of the foreign currency forward contracts related to our net
investment hedge were $3 billion as of December 31, 2012. The fair value of the foreign currency contracts was
$3 million as of December 31, 2012 and is included in prepaid expenses and other current assets on the
consolidated balance sheet. A gain of $3 million was recorded for the year ended December 31, 2012 and is
included in accumulated other comprehensive income on our consolidated balance sheet.
Balance Sheet Exposure. We hedge our net recognized foreign currency assets and liabilities with foreign
exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by
changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities, including
intercompany transactions that are denominated in foreign currencies. The balance sheet hedges are carried at fair
value with changes in the fair value recorded in other income, net on our consolidated statements of income.
These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements
because gains and losses on these derivatives are intended to offset gains or losses on the assets and liabilities
being hedged. The notional amounts of the foreign currency forward contracts were $356 million and $92 million
as of December 31, 2012 and 2011, respectively. We did not enter into any derivative instruments in fiscal year
2010. The fair value of the foreign currency forward contract liability was $5 million and $3 million as of
December 31, 2012 and 2011, respectively, and was recorded as a gain of $4 million and loss of $3 million for
the years ended December 31, 2012 and 2011, respectively.
Translation Exposure. We are also exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries and our investments in equity interests into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial
statements into U.S. dollars results in a gain or loss which is recorded as a component of accumulated other
comprehensive income which is part of stockholders’ equity. We do not hedge our exposure to foreign currency
risks arising from translation, except for the Japanese yen forward contracts entered into related to our
investment in Yahoo Japan.
A Value-at-Risk (“VaR”) sensitivity analysis was performed on all of our foreign currency derivative positions
as of December 31, 2012 and December 31, 2011 to assess the potential impact of fluctuations in exchange
rates. The VaR model uses a Monte Carlo simulation to generate thousands of random price paths assuming
normal market conditions. The VaR is the maximum expected one day loss in fair value, for a given statistical
confidence level, to our foreign currency derivative positions due to adverse movements in rates. The VaR model
is used as a risk management tool and is not intended to represent either actual or forecasted losses. Based on the
results of the model using a 99 percent confidence interval, we estimate the maximum one-day loss in fair value
is $2.8 million on the notional value of our balance sheet hedges at December 31, 2012 compared to a $0.7
million loss at December 31, 2011. The maximum one-day loss in fair-value is $27.7 million on the notional
value of the net investment hedges at December 31, 2012. There were no net investment hedges outstanding at
December 31, 2011.
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