Item 3. Quantitative and Qualita tive Disclosures About Market Risk

Item 3.

Quantitative and Qualitative Disclosures About Marke t Risk

We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relat ing to quantitative and qual itative disclosures about market risk is set forth b elow and in Item 2 of Part I, “Man agement’s Discussion and Analysis of Financial Condition and Results of Ope rations — Liquidity and Capital Resou rces.”

Interest Rate Risk

Our exposure to market risk fo r changes in interest ra tes relates primar ily to our investment portfo lio and our long-term debt. Our long -term debt is carri ed at amortized cost and flu ctuations in interest r ates do not impact our consolid ated financial stat ements. However, the fair valu e of our debt, which pays interest at a fixed rate, will gener ally fluctuate with move ments of interest rat es, increasing in periods of de clining rates of inter est and declining in periods of increasing rates of interest. We gener ally invest our excess cash in AAA-ra ted money market funds and inves tment grade short- to int ermediate-term fixed income securiti es. Fixed income securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in m arket value due to changes in interest rates.

Foreign Exchange Risk

During Q2 2021, net sales from our Inte rnational segment accoun ted for 27% of our consolidated revenues. Net sales and rela ted expenses generated from our internationally- focused stores, including within Canad a and Mexico (which are includ ed in our North America segment ), are primarily denom inated in the functional currenci es of the corresponding stores and p rimarily include Euros, Bri tish Pounds, and Japanese Yen. The results of ope rations of, and certain of our intercompany balances associated with, our interna tionally-focused stores and AWS a re exposed to foreign exchange rate fluctuations. Upon consolid ation, as foreign exchange rates v ary, net sales and other oper ating results may diffe r materially from expectations, and we may reco rd significant gains or losses on the remeasurement of in tercompany balances. For exa mple, as a result of fluc tuations in foreign exchange rates throughout the period co mpared to rates in eff ect the prior year, Internat ional segment net sales in Q2 2021 in creased by $2.1 billion in compa rison with Q2 2020. We have foreign exchange risk related to foreign -denominated cash, cash equiv alents, and marketable s ecurities (“foreign funds”). Based on the balance of foreign funds as of June 30, 2021, of $18.5 bill ion, an assumed 5%, 10%, and 20% adverse change to foreign exchange would r esult in fair value dec lines of $925 million, $1.8 billion, and $3.7 bil lion. Fluctuations in fair va lue are recorded in “Accu mulated other comprehens ive income (loss),” a sepa rate component of stockholders’ equity. Equity securities with readily determinable fair values are included in “Marketable securities” on our consolidated balance sheets and are measured at fair va lue with changes recognized in n et income. We have foreign exchange risk related to our inte rcompany balances denomina ted in various foreign curr encies. Based on the intercomp any balances as of June 30, 2021, an assumed 5%, 10%, and 20% advers e change to foreign exchange rates would result in losses of $240 m illion, $480 million, and $965 mil lion, recorded to “Other incom e (expense), net.” See Item 2 of Part I, “Manag ement’s Discussion and Analysis of Financ ial Condition and Results of Operations — Resu lts of Operations — Effect of Foreign Exchange Rates” for addi tional information on the effect on reported resu lts of changes in foreign exch ange rates.

Equity Investment Risk

As of June 30, 2021, our recorded value in equ ity and equity warrant invest ments in public and private companies was $9.8 billion. Our equity and equity warrant investments in publ icly traded companies r epresent $4.7 billion of our inves tments as of June 30, 2021, and are re corded at fair value, which is subject to market price volatility. We carry our equity warrant investments in private companies at fair value and adjust our equity investments in private companies for observable price changes or impairments. Valuations of private companies are inherently more complex due to the lack of readily available market data. The current global economic climate provides additional uncertainty. As such, we believe that market sensitivities are not practicable.

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