Cisco 2012 Annual Report Download - page 85

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Foreign Currency Exchange Risk
Our foreign exchange forward and option contracts outstanding at fiscal year-end are summarized in U.S. dollar
equivalents as follows (in millions):
July 28, 2012 July 30, 2011
Notional
Amount Fair Value
Notional
Amount Fair Value
Forward contracts:
Purchased ................................. $3,336 $(10) $3,722 $ 9
Sold ..................................... $1,566 $ 5 $1,225 $(10)
Option contracts:
Purchased ................................. $2,478 $ 31 $1,547 $ 63
Sold ..................................... $2,239 $(25) $1,577 $(12)
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on sales
has not been material because our sales are primarily denominated in U.S. dollars. However, if the U.S. dollar
strengthens relative to other currencies, such strengthening could have an indirect effect on our sales to the extent
it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker U.S. dollar could
have the opposite effect. However, the precise indirect effect of currency fluctuations is difficult to measure or
predict because our sales are influenced by many factors in addition to the impact of such currency fluctuations.
Approximately 70% of our operating expenses are U.S.-dollar denominated. In fiscal 2012, foreign currency
fluctuations, net of hedging, increased the combined R&D, sales and marketing, and G&A expenses by $90
million, or approximately 0.5%, compared with fiscal 2011, and 0.3% in fiscal 2011 compared with fiscal 2010.
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 forecasted foreign currency 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 that are 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 ..... Upto18months
Forward contracts—current assets and liabilities ...................................................... Upto3months
Forward contracts—net investments in foreign subsidiaries ............................................. Upto6months
Forward contracts—long-term customer financings ................................................... Upto2years
Forward contracts—investments .................................................................. Upto2years
We do not enter into foreign exchange forward or option contracts for trading purposes.
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