HPQ Exposure to Interest Rate Risk

Now let’s look at the HPQ’s exposure to Interest Rate
Risk. HPQ’s 10K shows that the company is exposed to interest rate risk related
to debt it issues and its investment portfolio. HPQ issues long-term debt in
either U.S. dollars or foreign currencies based on market conditions at the
time of financing. The company’s aggregate future maturities of debt at face
value, including capital lease obligations as of October, 2016, are shown in figure 5.6. From figure 5.7 we see that HPQ’s borrowings over the period is slowing
down which is a good sign, meaning it has sufficient resources to fuel its
business.

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Credit rating15 for HPQ remains at an
investment grade level with moderate risk having a stable outlook. This
information can also be complimented by the Debt-Equity ratio HPQ maintains as
shown in figure 5.6. The company’s
10K confirms that in the fiscal year 2016, debt-to equity ratio decreased by
2.08x, primarily due to negative equity resulting from transfer of net assets
of $32.5 billion to Hewlett Packard Enterprise and redemption of $2.1 billion
of fixed-rate U.S. dollar global notes due to the separation.

Form the company’s 10K we see that to modify the
market risk exposures in connection with the debt and to achieve U.S. dollar
LIBOR1-based
floating interest expense, HPQ engages in interest rate and currency swaps. The
10K also makes us aware that in order to hedge the fair value of certain
fixed-rate investments, HPQ enters into interest rate swaps that convert fixed
interest returns into variable interest returns. HPQ also uses cash flow hedges
to hedge the variability of LIBOR-based interest income received on certain
variable-rate investments and it further enters into interest rate swaps that
convert variable rate interest returns into fixed-rate interest returns.

From the 10K we further learn that HPQ utilizes derivative
contracts to offset the company’s exposure to interest rate risk. Such derivative
contracts do involve the risk from its counterparty’s non-performance, which at
times may further result in a loss. However the company estimates the
likelihood of this happening is very remote. HPQ uses derivative instruments,
primarily forwards, swaps, and options, to hedge certain interest rate
exposures. The derivative value of the Interest Rate contracts for periods
October 2016 and October 2015 are $48 million and $58million respectively.

1 LIBOR
www.bankrate.com/rates/interest-rates/libor.aspx

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