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44 Cisco Systems, Inc.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Derivatives
Our interest rate derivatives are summarized as follows (in millions):
July 28, 2007 July 29, 2006
Notional
Amount Fair Value
Notional
Amount Fair Value
Interest rate swaps—investments $ 1,000 $ 29 $ 1,000 $ 45
Interest rate swaps—long-term debt $ 6,000 $ (81) $ 6,000 $ (155)
Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with 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.
We have entered into $1.0 billion of interest rate swaps designated as fair value hedges of our investment portfolio. Under these
interest rate swap contracts, we make fixed-rate interest payments and receive interest payments based on LIBOR. The effect of these
swaps is to convert fixed-rate returns to floating-rate returns based on LIBOR for 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, net, and offset the changes in fair value of the
underlying hedged investment. The fair values of the interest rate swaps designated as hedges of our investments are reflected in prepaid
expenses and other current assets.
In conjunction with our issuance of fixed-rate senior notes in February 2006, we entered into $6.0 billion of interest rate swaps
designated as fair value hedges of our fixed-rate debt. Under these interest rate swap contracts, we receive fixed-rate interest payments
and make interest payments based on LIBOR. The effect of these swaps is to convert fixed-rate interest expense to floating-rate interest
expense based on LIBOR. The gains and losses related to changes in the value of the interest rate swaps are included in other income, net,
and offset the changes in fair value of the underlying debt. The fair values of the interest rate swaps designated as hedges of our debt are
reflected in other long-term liabilities.
Equity Derivatives
Our equity derivatives are summarized as follows (in millions):
July 28, 2007 July 29, 2006
Notional
Amount Fair Value
Notional
Amount Fair Value
Forward sale and option agreements $ 458 $ 1 $ 164 $ 93
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 diversify our overall investment portfolio. To manage our exposure to changes in the fair value of certain equity securities,
we may enter into equity derivatives, including forward sale and option agreements. As of July 28, 2007, we have entered into forward sale
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, net, and offset the change in the fair value of the underlying hedged investment.
The fair values of the equity derivatives are reflected in prepaid expenses and other current assets and other accrued liabilities.