Financial Risk Management by Verizon

SAURABH BARNWAL, MPE 4TH BATCH, NMIMS

Date – 01/01/2013

Market Risk

Verizon is exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in investment, equity and commodity prices and changes in corporate tax rates. Verizon employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate and commodity swap agreements and interest rate locks. Verizon do not hold derivatives for trading purposes.

Interest Rate Risk

Verizon is exposed to changes in interest rates, primarily on its short-term debt and the portion of long-term debt that carries floating interest rates. The impact of a 100 basis point change in interest rates affecting Verizon’s floating rate debt would result in a change in annual interest expense, including Verizon’s interest rate swap agreements that are designated as hedges, of approximately $0.1 billion. The interest rates on Verizon’s existing long-term debt obligations are unaffected by changes to its credit ratings.

Sensitivity analysis of the estimated fair values

Fair Value

Fair Value assuming +100

basis point shift

Fair Value assuming -100

basis point shift

At December 31, 2011

Long-term debt and related derivatives

$ 61,870 $ 58,117 $ 66,326

At December 31, 2010

Long-term debt and related derivatives

$ 58,591 $ 55,427 $ 62,247

Interest Rate Swaps

Verizon have entered into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. Verizon principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. Verizon record the interest rate swaps at fair value on its consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps due to changes in interest rates are recorded to Interest expense, which are offset by changes in the fair value of the debt. The fair value of these contracts was $0.6 billion at December 31, 2011 and $0.3 billion at December 31, 2010 and is primarily included in Other assets and Long-term debt. As of December 31, 2011, the total notional amount of these interest rate swaps was $7.0 billion.

Foreign Currency Translation

The functional currency of Verizon’s foreign operations is primarily the local currency. The translation of income statement and balance sheet amounts of Verizon’s foreign operations into U.S. dollars is recorded as cumulative translation adjustments, which are included in Accumulated other comprehensive loss in Verizon’s consolidated balance sheets. Gains and losses on foreign currency transactions are recorded in the consolidated statements 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.

Cross Currency Swaps

During 2008, Verizon Wireless entered into cross currency swaps designated as cash flow hedges to exchange approximately $2.4 billion of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix its future interest and principal payments in U.S. dollars, as well as mitigate the impact of foreign currency transaction gains or losses. During December 2011, Verizon repaid $0.9 billion upon maturity for the €0.7 billion of 7.625% Verizon Wireless Notes. The settlement of the related cross currency swap did not have a material impact on our financial statements. The fair value of the outstanding swaps, primarily included in Other assets, was approximately $0.1 billion at December 31, 2011 and December 31, 2010, respectively.

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