Cisco 2008 Annual Report Download - page 40

2008 Annual Report 45
Quantitative and Qualitative Disclosures About Market Risk
We also enter into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on
receivables, investments, and payables, primarily denominated in Australian, Canadian, Japanese, and several European currencies,
including the euro and British pound. Our market risks associated with our foreign currency receivables, investments, and payables relate
primarily to variances from our forecasted foreign currency transactions and balances. Our forward and option contracts generally have
the following maturities:
Maturities
Forward and option contracts—forecasted transactions related to operating expenses Less than 18 months
Forward contracts—current assets and liabilities 1 to 3 months
Forward contracts—long-term customer financings Up to 2 years
Forward contracts—investments Less than 2 years
We do not enter into foreign exchange forward or option contracts for trading purposes.
Interest Rate Derivatives
Our interest rate derivatives are summarized as follows (in millions):
July 26, 2008 July 28, 2007
Notional
Amount Fair Value
Notional
Amount Fair Value
Interest rate swaps—investments $ 1,000 $ (4) $ 1,000 $ 29
Interest rate swaps—long-term debt $ — $ — $ 6,000 $ (81)
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.
Interest Rate Swaps, Investments 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 (loss), 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 or other current liabilities.
Interest Rate Swaps, Long-Term Debt 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 the fixed-rate debt. The effect of these swaps was to convert fixed-rate
interest expense to floating-rate interest expense based on LIBOR. During the third quarter of fiscal 2008, we terminated these interest
rate swaps and received proceeds of $432 million, net of accrued interest, which was recorded as a hedge accounting adjustment to the
carrying amount of the fixed-rate debt and is being amortized as a reduction of interest expense over the remaining terms of the fixed-rate
notes. While such interest rate swaps were in effect, their fair values were reflected in other assets or other long-term liabilities, and prior to
their termination, the gains and losses related to changes in the value of such interest rate swaps were included in other income (loss), net,
and offset the changes in fair value of the underlying debt.