Blackberry 2005 Annual Report Download - page 37

35
Market Risk of Financial Instruments
The Company is engaged in operating and financing activities that generate risk in three primary areas:
Foreign Exchange
The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its
functional currency of the U.S. Dollar. The majority of the Company’s revenues in fiscal 2005 are transacted in
U.S. Dollars, Canadian Dollars, Euros and British Pounds. Purchases of raw materials are primarily transacted
in U.S. Dollars. Other expenses, consisting of the majority of salaries, certain operating costs and most
manufacturing overhead, are incurred primarily in Canadian Dollars. At February 26, 2005, approximately 2%
of cash and cash equivalents, 42% of trade receivables and 22% of accounts payable and accrued liabilities
are denominated in foreign currencies (February 28, 2004 – 2%, 26%, and 18%, respectively). These foreign
currencies include the Canadian Dollar, British Pound and Euro. As part of its risk management strategy, the
Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign
currency hedging activities using derivative financial instruments, including forward contracts and options.
The Company does not use derivative instruments for speculative purposes.
To hedge exposures relating to foreign currency anticipated transactions, the Company has entered into
forward contracts to sell U.S. Dollars and purchase Canadian Dollars, to sell Euros and purchase U.S. Dollars,
and to sell British Pounds and purchase U.S. Dollars. These contracts have been designated as cash flow
hedges, with the resulting changes in fair value recorded in other comprehensive income, and subsequently
reclassified to earnings in the period in which the cash flows from the associated hedged transactions affect
earnings. These cash flow hedges were fully effective at February 26, 2005. As at February 26, 2005, the
unrealized gain on these forward contracts was approximately $14,644 (February 28, 2004 - $5,468). These
amounts were included in Other current assets and Accumulated other comprehensive income.
To hedge exposure relating to foreign currency denominated long-term debt, the Company has entered into
forward contracts to sell U.S. Dollars and purchase Canadian Dollars. These contracts have been designated
as fair value hedges, with gains and losses on the hedge instruments being recognized in earnings each
period, offsetting the change in the U.S. dollar value of the hedged liability. As at February 26, 2005, a gain
of $482 was recorded in respect of this amount (February 28, 2004 – loss of $69). This amount was included
in Selling, marketing and administration expenses.
To hedge exposure relating to foreign currency cash and receivable balances, the Company has entered into
forward contracts to sell Euros and purchase U.S. Dollars and to sell British Pounds and purchase U.S. Dollars.
These contracts have been designated as fair value hedges, with gains and losses on the hedge instruments
being recognized in earnings each period, offsetting the change in the U.S. Dollar value of the hedged assets.
As at February 26, 2005, a loss of $529 was recorded in respect of this amount (February 28, 2004 – Nil). This
amount was included in Selling, marketing and administration expenses.
Interest Rate
Cash, cash equivalents and investments are invested in certain instruments of varying maturities.
Consequently, the Company is exposed to interest rate risk as a result of holding investments of varying
maturities. The fair value of investments, as well as the investment income derived from the investment
portfolio, will fluctuate with changes in prevailing interest rates. The Company does not currently use
interest rate derivative financial instruments in its investment portfolio.
For the years ended February 26, 2005, February 28, 2004 and March 1, 2003