Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. 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 and Indian rupee in the year ended December 31, 2023. 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, Indian rupee 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 increased from 54.49 pesos during the year ended December 31, 2022 to 55.61 pe sos during the year ended December 31, 2023, representing a depreciation of the Philippine peso of 2.1%. Based upon our level of operations during the year ended December 31, 2023, 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 $37.1 million or $30.3 million, respectively, in the year ended December 31, 2023.
The average exchange rate of the Indian rupee against the U.S. dollar increased from 78.51 rupees during the year ended December 31, 2022 to 82.58 rupees during the year ended December 31, 2023, representing a depreciation of the Indian rupee of 5.2%. Based upon our level of operations during the year ended December 31, 2023, and excluding any forward contract arrangements that we had in place during that period, a 10% appreciation/depreciation in the Indian rupee against the U.S. dollar would have increased or decreased our expenses incurred and paid in the Indian rupee by approximately $9.0 million or $7.3 million, respectively, in the year ended December 31, 2023.
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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, and economically hedge our intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, we enter into foreign currency forward contracts. These derivatives have not been designated as hedges under ASC 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 expense (income), net.
For the years ended December 31, 2023 and 2022, we realized losses (gains) of $(2.6) million and $13.3 million, respectively, resulting from the settlement of forward contracts were included within other expense (income), net.
For the years ended December 31, 2023 and 2022, we had outstanding forward contracts. The forward contract receivable (payable) resulting from change in fair value was recorded under prepaid expenses and other current assets (accounts payable and accrued liabilities). For the years ended December 31, 2023 and 2022, unrealized losses (gains) on the forward contracts of $2.5 million and $(4.6) million, respectively, were included within other expense (income), net.
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. 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 2022 Credit Facilities. All of our borrowings outstanding under the 2022 Credit Facilities as of December 31, 2023 accrue interest at SOFR pl us 2.25%. Our total principal balance outstanding as of December 31, 2023 was $265.6 million. Based on the outstanding balances and interest rates under the 2022 Credit Facilities as of December 31, 2023, a hypothetical 10% increase or decrease in SOFR would cause an increase or decrease in interest expense of $1.4 million over the next 12 months.
Credit Risk
As of December 31, 2023, we had accounts receivable, net of allowance for credit losses, of $176.8 million, of which $49.8 million was owed by two of our clients. Collectively, these clients represented 28% of our gross accounts receivable as of December 31, 2023.
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