Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect our operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities. We address market risks from changes in foreign currency exchange rates through a risk management program that includes the use of derivative financial instruments to mitigate certain foreign currency transaction exposures from future settlement of non-functional currency monetary assets and liabilities as of the end of a period.
Foreign Currency Exchange Rate Risk and Sensitivity
We are exposed to changes in foreign currency exchange rates which could affect our operating results as well as our financial position and cash flows. The foreign currencies to which we have the most significant exchange rate exposures are the Euro, British Pound and Japanese Yen. The Company manages its foreign currency exposures on a consolidated basis, which allows the Company to analyze exposures globally and take into account offsetting exposures in certain balances. The primary foreign currency denominated transactions include revenue and expenses and the resulting accounts receivable and accounts payable balances reflected on our consolidated balance sheet and with intercompany trading partners that are eliminated in consolidation.
In the ordinary course of business, we enter into foreign currency contracts for periods consistent with our committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. We do not enter into or hold foreign currency derivative financial instruments for trading or speculative purposes, nor do we enter into derivative financial instruments to hedge future cash flows or forecasted transactions. The intent of these economic hedges is to offset gains and losses on the underlying exposures from these currencies with gains and losses resulting from the foreign currency contracts that hedge these exposures.
We had foreign currency contracts with notional amounts totaling $28.5 million and a fair value of less than $0.1 million as of December 31, 2020. A hypothetical 10% strengthening of the U.S. dollar against other currencies would result in an approximately $1.6 million increase in the fair value of our foreign currency contracts as of December 31, 2020. By contrast, a hypothetical 10% weakening of the U.S. dollar against other currencies would result in an approximately $1.6 million decrease in the fair value of our foreign currency contracts as of December 31, 2020.
Interest Rates
Our exposure to market risk associated with changes in interest rates relates primarily to our debt obligations. We have $204.8 million of outstanding variable rate debt as of December 31, 2020. A 100 basis point increase in interest rates at December 31, 2020 would increase our annual pre-tax interest expense by approximately $2.0 million.
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