We currently hedge our net investment in Yahoo! Japan with forward contracts to reduce the risk that our investment in Yahoo! Japan will be adversely affected by foreign currency exchange rate fluctuations. The forward contracts are required to be settled in cash and the amount of cash payment we receive or could be required to pay upon settlement could be material.And later on
Net Investment Exposure. In December 2012, we began hedging, on an after-tax basis, our net investment in Yahoo! Japan with forward contracts to reduce the risk that our investment in Yahoo! Japan will be adversely affected by foreign currency exchange rate fluctuations. The forward contracts have maturities ranging from nine to 15 months. If the Japanese yen appreciates at maturity from the forward contract execution rates, the forward contracts will require us to pay a cash settlement, which may be material. If the Japanese yen depreciates at maturity from the forward contract execution rates, we will receive a cash settlement, which may be material. We have elected to apply net investment hedge accounting and expect the hedges to be effective, allowing changes in fair value of the derivative instrument to be recorded in accumulated other comprehensive income on our consolidated balance sheet. The notional amounts of the foreign currency forward contracts related to our net investment hedge were $3 billion as of Dec. 31, 2012. The fair value of the foreign currency contracts was $3 million as of Dec. 31, 2012 and is included in prepaid expenses and other current assets on the consolidated balance sheet. A gain of $3 million was recorded for the year ended Dec. 31, 2012 and is included in accumulated other comprehensive income on our consolidated balance sheet.At the end of December, one U.S. dollar bought you 84 yen. Earlier last September, it bought 77 yen. At the moment, it buys 95 yen as the yen has weakened considerably over this period with the support of the Japanese central bank. This is a 13% weakening since mid-December. We don't know when Yahoo! hedged its Yahoo! Japan (YJ) investment. However, a 13% gain on $3 billion in notional value is $390 million. To give some perspective to that amount, in 2012, Yahoo! gained $83 million in YJ dividends. Also, net income attributable to YJ in 2012 was $1.3 billion. So, such a gain on a forward currency contract in the first quarter could be highly material. The other big thing that jumps out in the Yahoo! 10-K is the Microsoft ( MSFT) revenue guarantee is set to end at the end of this month. This was already renewed a year ago. Some are worried that, if Marissa Mayer terminated the agreement at the end of the month, it could be a big negative for the stock -- unless it already had a deal with Google ( GOOG), which has its own issues of course from a regulatory risk perspective. I think it's highly unlikely the agreement with Microsoft will end. It's not really in the interest of either party to terminate it. There were also some recent executive shuffles on both sides relating to working on the alliance, which would be strange if either side was planning to simply end the relationship in a few weeks.
One other possible hint from the 10-K that the Microsoft deal might not be terminated at the end of the month: If you compare the language describing the relationship between this year's 10-K and last year's, it didn't really change that much. If there was a strong likelihood that Yahoo! was thinking of terminating the agreement, I would have expected more language in the "risk factors" section describing the relationship. We will have to sit tight and see what happens. In the meantime, the gains from Yahoo!'s YJ forward hedging program should pay immediate dividends in the April results announced in a few weeks. Yahoo! investors can likely thank Dan Loeb again for his input on the board. He's really the only person on the board or in management who would have the knowledge and experience to demand that Yahoo! be more thoughtful and opportunistic when the yen was trading at such strong levels at the end of last year. And to think former Yahoo! CEO Scott Thompson was trying to keep Loeb off the board because he lacked sufficient experience to be an effective director. What a bizarre argument. Since Scott Thompson was fired for lying on his resume on May 13 of last year, Yahoo!'s stock is up 51%. At the time of publication the author was long YHOO. Follow @ericjackson This article was written by an independent contributor, separate from TheStreet's regular news coverage.