What is the subject of Budget's derivative instruments and hedging activities?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
cluding, where applicable, maturity, currency exchange rates, our interest rate yield curves and counterparties, credit curves, counterparty creditworthiness and commodity prices. These factors are applied on a consistent basis and are based upon observable inputs where available.
Derivative Instruments
Derivative instruments are used as part of our overall strategy to manage exposure to market risks associated with fluctuations in currency exchange rates, interest rates and fuel costs. As a matter of policy, derivatives are not used for trading or speculative purposes.
All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging instruments are recognized currently in earnings within the same line item as the hedged item. The changes in fair value of a derivative that is designated as either a cash flow or net investment hedge is recorded as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transcript affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. Amounts related to our derivative instruments are recognized in the Consolidated Statements of Cash Flows consistent with the nature of the hedged item (principally operating activities).
Currency Transactions
Currency gains and losses resulting from foreign currency transactions are generally included in operating expenses within the Consolidated Statements of Operations; however, the net gain or loss of currency transactions on intercompany loans and the unrealized gain or loss on intercompany loan hedges are included within interest expense related to corporate debt, net.
Self-Insurance Reserves
The Consolidated Balance Sheets include $451 million and $397 million of liabilities associated with retained risks of liability to third parties as of December 31, 2024 and 2023, respectively. Such liabilities relate primarily to public liability and third-party property damage claims, as well as claims arising from the sale of anciliary insurance products including, but not limited to, supplemental liability, personal effects protection and personal accident insurance. These obligations represent an estimate for both reported claims not yet paid and claims incurred but not yet reported.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, the company uses derivative instruments and hedging activities to manage exposure to market risks associated with fluctuations in currency exchange rates, interest rates, and fuel costs. Budget's derivative assets and liabilities consist principally of currency exchange contracts, interest rate swaps, interest rate caps, and commodity contracts. These derivatives are not used for trading or speculative purposes, as a matter of policy. All derivatives are recorded at fair value as either assets or liabilities. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings within the same line item as the hedged item.
Budget uses currency exchange contracts to manage exposure to changes in currency exchange rates associated with non-U.S. dollar denominated receivables, forecasted royalties, earnings of non-U.S. subsidiaries, and non-U.S. dollar denominated acquisitions. Budget primarily hedges a portion of its current-year currency exposure to the Australian, Canadian, and New Zealand dollars, the euro, and the British pound sterling. Budget also uses interest rate swaps and interest rate caps to manage the risk related to floating rate corporate debt and floating rate vehicle-backed debt.
Budget also enters into derivative commodity contracts to manage exposure to changes in the price of fuel. These instruments are designated as freestanding derivatives, and the changes in fair value are recorded in earnings and presented in the same line of the income statement expected for the hedged item. These strategies are part of Budget's overall risk management efforts related to currency, interest rates, and commodity prices, aiming to mitigate potential adverse impacts from market volatility.