Walmart Sto.res Inc is a leading retail outlet in the world with operations in the U.S. segment, international and Sam’s Club. The company uses digital and physical shopping to reach its customers throughout the world. The company serves 260 million customers each week in its 11695 stores in 28 countries as well as e-commerce websites in 11 nations. The company uses price leadership strategies and differentiation on access, deliver a great experience and to be competitive on assortment. The company maintains the trust of its clients by delivering high-quality merchandise and services at low price. It uses everyday low pricing as its philosophy. Price leadership is the core of the business and it's committed to controlling its expenses passing the cost savings to the clients. The digital and physical outlets offer access to different products and services anytime and anywhere. The fiscal year ends on January 31. In 2017, the company generates $485.9 billion as revenues where the net sales totaled $481.3 billion (Walmart, 20l8). This paper looks at the hedging techniques used by Walmart Stores Inc. The treatment of foreign currencies and derivative contract in the 2015-2017 financial year are determined.
Derivative Financial Instruments
Walmart uses derivatives to hedge and nontrading purposes in the management of its exposure to changing interest and currency exchange rate. The company also maintains an appropriate mix of debt which includes both fixed and variable. Derivative financial instrument exposes the company t market and credit risk. Market risk shows the potential for a change in the derivative financial instrument. Changes in the derivative are offset by a change in the value of the underlying items. Credit risk in a derivative financial instrument shows the likelihood that counterparty will not dishonor the terms of the contract. The company uses the notional and contractual value of the company's derivative financial instruments determines the interest to be paid or received and not the exposure to credit risk (Walmart, 2018). The company monitors credit risk using an approved procedure that includes concentration limits, review of the credit ratings and asking for collateral from the counterparty when it is appropriate.
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Walmart participates in derivative transactions from counterparties that are rated A- or better by rating agencies. The company also monitors their credit ratings subsequently. The cash collaterals from counterparties are recorded as amounts due to counterparties and are exclusive of any derivative assets. The company also posts collateral with counterparties if the liability exceeds $150 million. The cash collaterals with the counterparties are posted as amounts receivable from the counterparties (Walmart. 2018).
Walmart uses derivative financial instruments to hedge its exposure to interest and currency exchange rate risk. The contractual terms of hedged instruments are almost similar to those of hedged items and provide a high degree of risk reduction as well as correlation. Contracts that meet this criterion are reported using hedge accounting. Changes in the fair value of such instruments will be offset by a change in the fair value of the hedged asset as well as its liabilities or even the commitment of the firm through earnings. Investment and cash flows are effective hedges (Walmart. 2018).
Fair Value Instrument
Walmart receives a fixed rate and pays variable rate interest swaps used for hedging the fixed rate debt. The interest rate swaps subject to fixed interest rate payments as well as pay variable interest rate are designated as fair value hedges. Changes in the fair value of the derivative instruments are reported as earnings. However, they are offset by subsequent changes in the fair value of such items.
Net Investment Instruments
Walmart is party to cross-currency interest rate swaps used for hedging investment. It enters into an agreement for the exchange of fixed rate payment in one currency with another of a different currency. Changes in the fair value are recorded as together with accumulated comprehensive loss in order to offset currency translations adjustments in the related investment recorded in accumulated other comprehensive losses. The company used foreign currency denominated long-term debt for hedging net investments in foreign operations. The foreign currency denominated debt is designated yet qualifies as nonderivative hedging instruments. The instruments are recorded as other comprehensive loss which offset the foreign currency translation adjustment of net investment.
References
Rahman, N. (2015). Corporate Finance . North Ryde: McGraw-Hill Australia.
Walmart, (2018). Annual Reports & Proxies. (2018). Retrieved from http://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx
WMT form 10-K - 1/31/15. (2018). Retrieved from https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm
