Cisco 2015 Annual Report Download - page 77

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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 25, 2015 July 26, 2014
Notional Amount Fair Value Notional Amount Fair Value
Forward contracts:
Purchased .......................................... $ 1,988 $ (5) $ 2,635 $ (3)
Sold ................................................ $ 614 $ 2 $ 896 $ 2
Option contracts:
Purchased .......................................... $ 422 $ 6 $ 494 $ 5
Sold ................................................ $ 392 $ (3) $ 466 $ (2)
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on revenue has not been
material because our revenue is primarily denominated in U.S. dollars. However, if the U.S. dollar strengthens relative to other
currencies, as was the case during fiscal 2015, such strengthening could have an indirect effect on our revenue 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 revenue is
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 2015, foreign currency fluctuations, net of
hedging, decreased our combined R&D, sales and marketing, and G&A expenses by approximately $278 million, or 1.6%,
compared with fiscal 2014. In fiscal 2014, foreign currency fluctuations, net of hedging, decreased our combined R&D, sales and
marketing, and G&A expenses by approximately $153 million, or 0.9% as compared with fiscal 2013. 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 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 .............................................................. Upto 3 months
Forward contracts—net investments in foreign subsidiaries .................................................... Up to6months
Forward contracts—long-term customer financings ........................................................... Upto2 years
We do not enter into foreign exchange forward or option contracts for trading purposes.
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