Cisco 2009 Annual Report Download - page 40

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Quantitative and Qualitative Disclosures About Market Risk
Approximately 70% of our operating expenses are U.S.-dollar denominated. Foreign currency fluctuations, net of hedging, decreased
our operating expenses, categorized as research and development, sales and marketing, and general and administrative, by approximately
1.8% in fiscal 2009 compared with fiscal 2008 and increased our operating expenses by approximately 2.5% in fiscal 2008 compared with
fiscal 2007. To reduce variability in operating expenses and service cost of sales caused by non-U.S.-dollar denominated operating
expenses and costs, we hedge certain foreign currency forecasted transactions with currency options and forward contracts. These
hedging programs are not designed to provide foreign currency protection over long time horizons. In designing a specific hedging
approach, we consider several factors, including offsetting exposures, significance of exposures, costs associated with entering into a
particular hedge instrument, and potential effectiveness of the hedge. The gains and losses on foreign exchange contracts mitigate the
effect of currency movements on our operating expenses and service cost of sales.
We also enter into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on
receivables, investments, and payables, denominated in currencies other than the functional currencies of the entities. The market risks
associated with these 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 and service cost of
sales Up to 18 months
Forward contracts—current assets and liabilities Up to 3 months
Forward contracts—net investments in foreign subsidiaries Up to 6 months
Forward contracts—long-term customer financings Up to 2 years
Forward contracts—investments Up to 2 years
We do not enter into foreign exchange forward or option contracts for trading purposes.
38 Cisco Systems, Inc.