GROUP 1 AUTOMOTIVE INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to a variety of market risks, including interest rate risk and foreign currency exchange rate risk. We address interest rate risks primarily through the use of interest rate swaps. We do not currently hedge foreign exchange risk, as discussed further below. The following quantitative and qualitative information is provided regarding our foreign currency exchange rates and financial instruments to which we are a party at June 30, 2022 and from which we may incur future gains or losses from changes in market interest rates and/or foreign currency rates. We do not enter into derivative or other financial instruments for speculative or trading purposes. Interest Rates We have interest rate risk on our variable-rate debt obligations, primarily consisting of our U.S. Floorplan Line. Based on variable-rate borrowings outstanding of $1.6 billion and $1.1 billion for the six months ended June 30, 2022 and 2021, respectively, a 100 basis-point change in interest rates would have resulted in an approxim ate $6.7 million a nd $0.9 million change to our annual interest expense, respectively, after consideration of the average interest rate swaps in effect during the periods. To mitigate the impact of interest rate fluctuations, we employ an interest rate hedging strategy, whereby we swap variable interest rate exposure on a portion of our borrowings for a fixed interest rate. In addition, our exposure to changes in interest rates with respect to our variable-rate floorplan borrowings is partially mitigated by manufacturers’ interest assistance, which in some cases is influenced by changes in market-based variable interest rates. We reflect interest assistance as a reduction of new vehicle inventory cost until the associated vehicle is sold. During the six months ended June 30, 2022 and 2021, we recognized $28.2 million and $28.5 million, respectively, of interest assistance as a reduction of new vehicle cost of sales. Foreign Currency Exchange Rates The functional currency of our U.K. subsidiaries is the GBP. Our exposure to fluctuating foreign currency exchange rates relates to the effects of translating financial statements of those subsidiaries into our reporting currency, which we do not hedge against based on our investment strategy in these foreign operations. A 10% devaluation in average foreign currency exchange rates for the GBP to the USD would have resulted in a $132.8 million and $113.7 million decrease to our revenues for the six months ended June 30, 2022 and 2021, respectively. For additional information about our market sensitive financial instruments, see Note 7. Financial Instruments and Fair Value Measurements within our Notes to Consolidated Financial Statements.