Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Financial Instruments and Other

General

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We try to mitigate these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, our objective is not to hold or issue derivative financial instruments for trading or other speculative purposes. (Refer to Note 18. Fair Value Measurements and Derivative Instruments to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data.)

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates to our long-term debt obligations including future interest payments. At December 31, 2019, approximately 62.1% of our long-term debt was effectively fixed as compared to 59.1% as of December 31, 2018. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense.

Market risk associated with our long-term fixed rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At December 31, 2019 and 2018, we maintained interest rate swap agreements on the following fixed-rate debt instruments:

These interest rate swap agreements are accounted for as fair value hedges.

The estimated fair value of our long-term fixed-rate debt at December 31, 2019 was $5.6 billion, using quoted market prices, where available, or using the present value of expected future cash flows which incorporates risk profile. The fair value of our fixed to floating interest rate swap agreements was estimated to be a liability of $1.6 million as of December 31, 2019, based on the present value of expected future cash flows. A hypothetical one percentage point decrease in interest rates at December 31, 2019 would increase the fair value of our hedged and unhedged long-term fixed-rate debt by approximately $266.2 million and would increase the fair value of our fixed to floating interest rate swap agreements by approximately $16.5 million.

Market risk associated with our long-term floating-rate debt is the potential increase in interest expense from an increase in interest rates. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage this risk. A hypothetical one percentage point increase in interest rates would increase our forecasted 2020 interest expense by approximately $37.4 million, assuming no change in foreign currency exchange rates.

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At December 31, 2019 and 2018, we maintained interest rate swap agreements on the following floating-rate debt instruments:

(1) Interest rate swap agreements hedging the Euro-denominated term loan for Harmony of the Seas include EURIBOR zero-floors matching the hedged debt EURIBOR zero-floor. Amount presented is based on the exchange rate as of December 31, 2019.

(2) Interest rate swap agreements hedging the term loan for Odyssey of the Seas include LIBOR zero-floors matching the hedged debt LIBOR zero-floor. The anticipated unsecured term loan for the financing of Odyssey of the Seas is expected to be drawn in October 2020.

These interest rate swap agreements are accounted for as cash flow hedges.

The fair value of our floating to fixed interest rate swap agreements was estimated to be a liability of $65.4 million as of December 31, 2019 based on the present value of expected future cash flows. These interest rate swap agreements are accounted for as cash flow hedges.

Foreign Currency Exchange Rate Risk

Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements and collar options to manage portions of the exposure to movements in foreign currency exchange rates.

The estimated fair value, as of December 31, 2019, of our Euro-denominated forward contracts associated with our ship construction contracts was a liability of $139.2 million, based on the present value of expected future cash flows. As of December 31, 2019, the aggregate cost of our ships on order, not including ships on order by our Partner Brands and the Silversea Cruises ships that remain contingent upon final documentation and financing, was approximately $14.8 billion, of which we had deposited $881.5 million as of such date. Approximately 65.9% and 53.5% of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate at December 31, 2019 and 2018, respectively. A hypothetical 10% strengthening of the Euro as of December 31, 2019, assuming no changes in comparative interest rates, would result in a $972.2 million increase in the United States dollar cost of the foreign currency denominated ship construction contracts exposed to fluctuations in the Euro exchange rate. Our foreign currency forward contract agreements are accounted for as cash flow or net investment hedges depending on the designation of the related hedge.

Our international business operations subject us to foreign currency exchange risk. We transact business in many different foreign currencies and maintain investments in foreign operations which may expose us to financial market risk resulting from fluctuations in foreign currency exchange rates. Movements in foreign currency exchange rates may affect the value of our earnings in foreign currencies and cash flows. We manage most of this exposure on a consolidated basis, which allows us to take advantage of any natural offsets. Therefore, weakness in one particular currency might be offset by strengths in other currencies over time. The extent to which one currency is effective as a natural offset of another currency fluctuates over time. In addition, some foreign currency exposures have little to no mitigating natural offsets available.

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We consider our investments in our foreign operations to be denominated in relatively stable currencies and of a long-term nature. As of December 31, 2019, we maintained foreign currency forward contracts and designated them as hedges of a portion of our net investment in TUI Cruises of €173.0 million, or approximately $194.2 million based on the exchange rate at December 31, 2019. These forward currency contracts mature in October 2021.

We also address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries' and investments' functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments primarily in TUI Cruises of approximately €319.0 million, or approximately $358.1 million, through December 31, 2019. As of December 31, 2018, we had designated debt as a hedge of our net investments primarily in TUI Cruises of approximately €280.0 million, or approximately $320.2 million.

We have included net gains of approximately $96.8 million and $86.1 million of foreign-currency transaction remeasurement and changes in the fair value of derivatives in the foreign currency translation adjustment component of Accumulated other comprehensive loss at December 31, 2019 and 2018, respectively.

On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements and collar options to minimize the volatility resulting from the remeasurement of net monetary assets and liabilities denominated in a currency other than our functional currency or the functional currencies of our foreign subsidiaries. During 2019, we maintained an average of approximately $689.7 million of these foreign currency forward contracts. These instruments are not designated as hedging instruments. For the years ended December 31, 2019, 2018 and 2017 changes in the fair value of the foreign currency forward contracts resulted in gains (losses) of approximately $1.4 million, $(62.4) million and $62.0 million, respectively, which offset gains (losses) arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same years of $0.4 million, $57.6 million and $(75.6) million, respectively. These changes were recognized in earnings within Other income (expense) in our consolidated statements of comprehensive income (loss).

Fuel Price Risk

Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. Fuel cost (net of the financial impact of fuel swap agreements), as a percentage of our total revenues, was approximately 6.4% in 2019, 7.5% in 2018 and 7.8% in 2017. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.

As of December 31, 2019, we had fuel swap agreements to pay fixed prices for fuel with an aggregate notional amount of approximately $810.0 million, maturing through 2023. The fuel swap agreements represented 54% of our projected 2020 fuel requirements, 30% of our projected 2021 fuel requirements, 19% of our projected 2022 fuel requirements and 5% of our projected 2023 fuel requirements. These fuel swap agreements are generally accounted for as cash flow hedges. The estimated fair value of these contracts at December 31, 2019 was estimated to be a liability of $23.8 million. We estimate that a hypothetical 10% increase in our weighted-average fuel price from that experienced during the year ended December 31, 2019 would increase our forecasted 2020 fuel cost by approximately $36.8 million, net of the impact of fuel swap agreements.