Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information, together with information
included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes
key aspects of our market risk.
Market Risk
Market risk to us generally represents the risk
of changes in the value of our ETPs and Digital Funds that results from fluctuations in securities or commodity prices, foreign currency
exchange rates against the U.S. dollar, and interest rates. Nearly all our revenues are derived from advisory agreements for the WisdomTree
ETPs. Under these agreements, the advisory fee we receive is based on the average market value of the assets in the WisdomTree ETP portfolios
we manage.
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Fluctuations
in
the
value
of
the
ETPs
are
common
and
are
generated
by
numerous
factors
such
as
market
volatility,
the
global
economy,
inflation,
changes
in
investor
strategies
and
sentiment,
availability
of
alternative
investment
vehicles,
domestic
and
foreign
government
regulations,
emerging
markets
developments
and
others.
Accordingly,
changes
in
any
one
or
a
combination
of
these
factors
may
reduce
the
value
of
investment
securities
and,
in
turn,
the
underlying
AUM
on
which
our
revenues
are
earned.
These
declines
may
cause
investors
to
withdraw
funds
from
our
ETPs
in
favor
of
investments
that
they
perceive
as
offering
greater
opportunity
or
lower
risk,
thereby
compounding
the
impact
on
our
revenues.
We
believe
challenging
and
volatile
market
conditions
will
continue
to
be
present
in
the
foreseeable
future.
Interest
Rate
Risk
We
invest
our
corporate
cash
in
short-term
interest
earning
assets,
primarily
in
federal
agency
debt
instruments,
WisdomTree
fixed
income
ETFs,
U.S.
treasuries,
corporate
bonds,
money
market
instruments
at
a
commercial
bank
and
other
securities
which
totaled
$109.2
million
and
$135.9
million
as
of
December
31,
2023
and
September
30,
2024,
respectively.
During
the
nine
months
ended
September
30,
2024,
we
recognized
gains
on
these
financial
instruments
of
$2.6
million
and
any
gains/losses
recognized
in
the
future
may
be
material
to
our
operating
results.
We
do
not
anticipate
that
changes
in
interest
rates
will
have
a
material
impact
on
our
financial
condition
or
cash
flows.
In
addition,
our
Convertible
Notes
bear
interest
at
fixed
rates
of
5.75%
for
the
2028
Notes
and
3.25%
for
the
2026
Notes
and
the
2029
Notes.
Therefore,
we
have
no
direct
financial
statement
risk
associated
with
changes
in
interest
rates.
However,
the
fair
value
of
the
Convertible
Notes
changes
primarily
when
the
market
price
of
our
common
stock
fluctuates
or
interest
rates
change.
Exchange
Rate
Risk
We
are
subject
to
currency
translation
exposure
on
the
results
of
our
non-U.S.
operations,
primarily
in
the
United
Kingdom
and
Europe.
Foreign
currency
translation
risk
is
the
risk
that
exchange
rate
gains
or
losses
arise
from
translating
foreign
entities’
statements
of
earnings
and
balance
sheets
from
functional
currency
to
our
reporting
currency
(the
U.S.
dollar)
for
consolidation
purposes.
The
advisory
fees
earned
on
our
European
listed
ETPs
are
predominantly
in
U.S.
dollars
(and
also
paid
in
gold,
other
precious
metals
and
cryptocurrency,
as
described
below);
however,
expenses
for
corporate
overhead
are
generally
incurred
in
British
pounds.
Currently,
we
do
not
enter
into
derivative
financial
instruments
aimed
at
offsetting
certain
exposures
in
the
statement
of
operations
or
the
balance
sheet
but
may
seek
to
do
so
in
the
future.
Exchange
rate
risk
associated
with
the
euro
is
not
considered
to
be
significant.
Commodity
and
Cryptocurrency
Price
Risk
Fluctuations
in
the
prices
of
commodities
and
cryptocurrencies
that
are
linked
to
certain
of
our
ETPs
could
have
a
material
adverse
effect
on
our
AUM
and
revenues.
In
addition,
a
portion
of
the
advisory
fee
revenues
we
receive
on
our
ETPs
backed
by
gold,
other
precious
metals
and
cryptocurrencies
are
paid
in
the
underlying
metal
or
cryptocurrency.
While
we
readily
sell
the
gold,
precious
metals
and
cryptocurrencies
that
we
earn
under
these
advisory
contracts,
we
still
may
maintain
a
position.
We
currently
do
not
enter
into
arrangements
to
hedge
against
fluctuations
in
the
price
of
these
commodities
and
cryptocurrencies
and
any
hedging
we
may
undertake
in
the
future
may
not
be
cost-effective
or
sufficient
to
hedge
against
this
exposure.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.