Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our activities expose us to a variety of financial risks: market risk (includes foreign currency), interest rate risk and credit risk.
Foreign Currency Risk
Our exposure to market risk arises principally from exchange rate risk. Although substantially all of our revenues are denominated in U.S. dollars, a substantial portion of our expenses were incurred and paid in the Philippine peso in the six months ended June 30, 2020 and the six months ended June 30, 2021. We also incur expenses in U.S. dollars, and currencies of the other countries in which we have operations. The exchange rates among the Philippine peso and the U.S. dollar have changed substantially in recent years and may fluctuate substantially in the future.
The average exchange rate of the Philippine peso against the U.S. dollar decreased from 50.66 pesos during the six months ended June 30, 2020 to 48.24 pesos during the six months ended June 30, 2021, representing an appreciation of the Philippine peso of 4.8%. Based upon our level of operations during the six months ended June 30, 2021 and excluding any forward contract arrangements that we had in place during that period, a 10% appreciation/depreciation in the Philippine Peso against the U.S. dollar would have increased or decreased our expenses incurred and paid in the Philippine Peso by approximately $17.3 million or $14.2 million, respectively, in the six months ended June 30, 2021.
In order to mitigate our exposure to foreign currency fluctuation risks and minimize the earnings and cash flow volatility associated with forecasted transactions denominated in certain foreign currencies, we enter into foreign currency forward contracts. These derivatives do not qualify as fair value hedges under ASC No. Topic 815, Derivatives and Hedging (“ASC 815”). Changes in the fair value of these derivatives are recognized in the consolidated statements of income and are included in other income. These contracts must be settled on the day of maturity or may be canceled subject to the receipts or payments of any gains or losses respectively, equal to the difference between the contract exchange rate and the market exchange rate on the date of cancellation. We do not enter into foreign currency forward contracts for speculative or trading purposes.
For the three and six months ended June 30, 2021, we realized gains of $0.6 million and $1.4 million, respectively, resulting from the settlement of forward contracts were included within other (income) expense.
For the three and six months ended June 30, 2021, we had outstanding forward contracts. The forward contract receivable resulting from change in fair value was recorded under other current assets. For the three and six months ended June 30, 2021, the unrealized (gains) losses on the forward contracts of $(0.1) million and $1.7 million, respectively, were included within other (income) expense.
We also enter into foreign currency exchange rate contracts to economically hedge our intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies. These derivatives do not qualify as fair value hedges under ASC No. Topic 815, Derivatives and Hedging (“ASC 815”). Changes in the fair value of these derivatives are recognized in the consolidated statements of income and are included in foreign exchange gain/(loss). These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on the settlement of these derivatives are intended to offset revaluation losses and gains on the assets and liabilities being hedged.
Interest Rate Risk
Our exposure to market risk is influenced by the changes in interest rates paid on any outstanding balance on our borrowings, mainly under our 2019 Credit Facilities. All of our borrowings outstanding under the 2019 Credit Facilities as of June 30, 2021 accrue interest at LIBOR plus 2.25%. We entered into our 2019 Credit Facilities on September 25, 2019 and our total principal balance outstanding as of June 30, 2021 was $243.8. Based on the outstanding balances and interest rates under the 2019 Credit Facilities as of June 30, 2021, a hypothetical 10.0% increase or decrease in LIBOR would cause an increase or decrease in interest expense of less than $0.1 million over the next 12 months.
Credit Risk
As of June 30, 2021, we had accounts receivable, net of allowance for doubtful accounts, of $127.9 million, of which $39.1 million was owed by two of our clients. Collectively, these clients represented approximately 30% of our accounts receivable as of June 30, 2021, and nearly 40% of our service revenue for the six months ended June 30, 2021.
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