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54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND
FINANCIAL INSTRUMENTS
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe and
Japan, those transactions that are denominated in euro or yen subject us to exposure from movements in foreign
currency exchange rates. This exposure is primarily related to yen-denominated product and support revenue in
Japan and euro-denominated product and support revenue in certain European countries. In fiscal 2003 and 2002,
our exposures were 21.3 billion yen and 20.5 billion yen, respectively. In fiscal 2003 and 2002, our exposures were
274.0 million euros and 288.5 million euros, respectively.
In addition we also have long term investment exposures consisting of the capitalization and retained earnings
in our non-USD functional foreign subsidiaries. For the fiscal years ending November 28, 2003 and November 29,
2002 this long term investment exposure totaled a notional equivalent of $30.8 million and $33.9 million,
respectively. At this time we do not hedge these long term investment exposures.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in euro, which
mitigates a portion of the exposure related to yen and euro denominated product revenue. In addition, we hedge
firmly committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and
losses; however, the gains and losses on these contracts largely offset gains and losses on the assets, liabilities and
transactions being hedged. We also hedge a percentage of forecasted international revenue with forward and
purchased option contracts. Our revenue hedging policy is designed to reduce the negative impact on our forecasted
revenue due to foreign currency exchange rate movements. At November 28, 2003, total outstanding contracts
included the notional equivalent of $191.5 million in foreign currency forward exchange contracts and purchased
put option contracts with a notional value of $112.4 million. As of November 28, 2003, all contracts were set to
expire at various times through April 2004. The bank counterparties in these contracts expose us to credit-related
losses in the event of their nonperformance. However, to mitigate that risk we only contract with counterparties with
specific minimum rating requirements. In addition, our hedging policy establishes maximum limits for each
counterparty.
Economic Hedging – Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures
resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value,
may have maturities between one and twelve months. Such cash flow exposures result from portions of our
forecasted revenues denominated in currencies other than the U.S. dollar, primarily the Japanese yen and the euro.
We enter into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course
of business, and accordingly, they are not speculative in nature.
We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income
(loss), until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain
or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it
becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from
accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of
income at that time. For the fiscal year ended November 28, 2003, there were no such net gains or losses recognized
in other income relating to hedges of forecasted transactions that did not occur.
The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions.
The changes in fair value of the derivatives are intended to offset changes in the expected cash flows from the
forecasted transactions. We record any ineffective portion of the hedging instruments in other income (loss) on the
consolidated statement of income. The time value of purchased derivative instruments is deemed to be ineffective
and is recorded in other income (loss) over the life of the contract.