Risks facing Apple
Apple is a global company hence it faces many risks. One such risk is the interest rate risk. The company is subject to risks resulting from fluctuations in the interest rates in most of the leading industrialized countries. Change in interest rates in the US economy is the primary source of the company’s interest rate risk. Interest income on investments by the firm and the firm’s interest expense are sensitive to changes in the market interest rate. Analysis indicates that as of September 2014, the interest expense on the company's debt would increase by $110 million if the market interest rate increases by 1% (Investor.apple.com, 2015). Apple uses interest rate swaps to mitigate the exposure resulting from variations in the market interest rate. Interest rate swaps enable the corporation to convert fixed-interest securities into floating interest securities and vice versa. Besides, it limits credit to a single issuer of debt securities to reduce the risk of loss that could arise if the issuer defaults its interest obligations.
Apple Corporation also faces foreign currency risk since some of its transactions are carried out in foreign currencies. It is stated the most of the firm’s revenues are in currencies other than the US dollar. As the US dollar appreciates, Apple receives less US dollars than before for similar transactions in foreign currency. Apple uses currency forward and options contracts to hedge its foreign transactions (Investor.apple.com, 2015). Forward and option contracts enable the company to exchange a particular currency for another at a future date and an agreed rate (Madura, 2014). In the case of currency options, the firm only exercises the option when the spot rate at the time of making or receiving the payment is favourable with respect to the strike price (Madura, 2014). The company hedges only some of its material foreign exchange risks to reduce the cost of hedging.
Investor.apple.com,. (2015). Apple Inc. - Annual Report. Retrieved 20 July 2015, from http://investor.apple.com/secfiling.cfm?filingid=1193125-14-383437&cik=#D783162D10K_HTM_TOC783162_9
Madura, J. (2014). International financial management (11th ed.). New York: Cengage Learning.