Cisco 2005 Annual Report Download - page 36

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39
Interest Rate Derivatives
Our primary objective for holding fixed income and debt securities is to increase our investment return while preserving principal and
managing risk. To realize these objectives, we may utilize interest rate swaps or other derivatives designated as fair value or cash flow
hedges. As of July 30, 2005, we had entered into $1 billion of interest rate swaps designated as fair value hedges. Under the interest
rate swap contracts, we make fixed-rate interest payments and receive interest payments based on the London InterBank Offered
Rate (LIBOR). The effect of these swaps is to convert fixed-rate returns to LIBOR-based returns on a portion of our fixed income
portfolio. The gains and losses related to changes in the value of the interest rate swaps are included in other income (loss), net, in the
Consolidated Statements of Operations and offset the changes in fair value of the underlying hedged investment. As of July 30, 2005,
the fair value of the interest rate swaps was $15 million. There were no interest rate derivatives as of July 31, 2004.
Equity Derivatives
We maintain a portfolio of publicly traded equity securities which are subject to price risk. We may hold equity securities for strategic
purposes or to provide diversification for our overall investment portfolio. In order to manage our exposure to changes in the value
of certain equity securities, we may, from time to time, enter into equity derivative contracts. As of July 30, 2005, we had entered
into forward sale and option agreements on certain publicly traded equity securities designated as fair value hedges. The gains and
losses due to changes in the value of the hedging instruments are included in other income (loss), net, in the Consolidated Statements
of Operations and offset the change in the fair value of the underlying hedged investment. As of July 30, 2005 the notional and fair
value amounts of the derivatives were $198 million and $19 million, respectively. There were no equity derivatives as of July 31, 2004.
Quantitative and Qualitative Disclosures about Market Risk