Adobe 2012 Annual Report Download - page 76

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76
totaled a notional equivalent of $419.6 million and $481.4 million, respectively. At this time, we do not hedge these long-term
investment exposures.
Economic Hedging—Hedges of Forecasted Transactions
We may use foreign exchange option contracts or forward 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 revenue denominated
in currencies other than the U.S. dollar, primarily the Euro, Yen, and British Pound. We enter into these foreign exchange contracts
to hedge forecasted 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, 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 to interest and other
income, net on our Consolidated Statements of Income at that time. For the fiscal year ended November 30, 2012, there were no
net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.
See Note 5 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the
risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative
instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the
fair value recorded as interest and other income, net. These derivative instruments do not subject us to material balance sheet risk
due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets
and liabilities being hedged. At November 30, 2012, the outstanding balance sheet hedging derivatives had maturities of 180 days
or less.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 30, 2012. This sensitivity
analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% shift in the value
of exchange rates relative to the U.S. dollar. For option contracts, the Black-Scholes equation model was used. For forward
contracts, duration modeling was used where hypothetical changes are made to the spot rates of the currency. A 10% increase in
the value of the U.S. dollar (and a corresponding decrease in the value of the hedged foreign currency asset) would lead to an
increase in the fair value of our financial hedging instruments by $64.0 million. Conversely, a 10% decrease in the value of the
U.S. dollar would result in a decrease in the fair value of these financial instruments by $35.1 million.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency
exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.
As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in countries
where a natural hedge exists. For example, in many countries, revenue from the local currency product licenses substantially
offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge currency
exposures, primarily related to operating expenses, on an ongoing basis.
We regularly review our hedging program and may as part of this review determine to change our hedging program.
See Note 5 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
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