Dell 2007 Annual Report Download - page 44

Table of Contents
However, as a result of our hedging activities, foreign currency fluctuations did not have a significant impact on our results of operations
and financial position during Fiscal 2008, 2007, and 2006.
Based on our foreign currency cash flow hedge instruments outstanding at February 1, 2008 and February 2, 2007, we estimate a
maximum potential one-day loss in fair value of approximately $57 million and $41 million, respectively, using a Value-at-Risk ("VAR")
model. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. We used a Monte Carlo
simulation type model that valued our foreign currency instruments against a thousand randomly generated market price paths.
Forecasted transactions, firm commitments, fair value hedge instruments, and accounts receivable and payable denominated in foreign
currencies were excluded from the model. The VAR model is a risk estimation tool, and as such, is not intended to represent actual losses
in fair value that will be incurred. Additionally, as we utilize foreign currency instruments for hedging forecasted and firmly committed
transactions, a loss in fair value for those instruments is generally offset by increases in the value of the underlying exposure.
Cash and Investments
At February 1, 2008, we have $9.5 billion of total cash, cash equivalents, and investments. Our investment policy is to manage our total
cash and investments balances to preserve principal and maintain liquidity while maximizing the return on the investment portfolio
through the full investment of available funds. We diversify our investment portfolio by investing in multiple types of investment-grade
securities and through the use of third-party investment managers.
Of the $9.5 billion, $7.8 billion is classified as cash and cash equivalents. Due to the nature of these investments, we consider it
reasonable to expect that their fair market values will not be significantly impacted by a change in interest rates, and that these
investments can be liquidated for cash at short notice. As of February 1, 2008, the carrying value of our cash equivalents approximated
fair value.
The remaining $1.7 billion is primarily invested in fixed income securities including government, agency, asset-backed, mortgage-backed
and corporate debt securities of varying maturities at the date of acquisition. The fair value of our portfolio is affected primarily by
interest rates more so than by the credit and liquidity issues currently facing the capital markets. We attempt to mitigate these risks by
investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with an A-1 rating, limiting the
amount that can be invested in any single issuer, and by investing in short to intermediate term investments whose market value is less
sensitive to interest rate changes. As of February 1, 2008, we did not hold any auction rate securities; at February 2, 2007, we held
auction rate securities that had a carrying value of $255 million. The total carrying value of investments in asset-backed and mortgage-
backed debt securities was approximately $550 million. Based on our investment portfolio and interest rates at February 1, 2008, a
100 basis point increase or decrease in interest rates would result in a decrease or increase of approximately $33 million in the fair value
of the investment portfolio.
We periodically review our investment portfolio to determine if any investment is other-than-temporarily impaired due to changes in
credit risk or other potential valuation concerns. At February 1, 2008, the fair value of securities below their carrying value was
$155 million. The unrealized loss of $9 million related to these securities has been recorded in other comprehensive income (loss), as we
believe the investments are not other-than-temporarily impaired. While certain available-for-sale securities have market values below
cost, we believe it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the
decline in the market value is exacerbated by the overall credit concerns in the market. Factors considered in determining whether a loss
is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis; the underlying
collateral, agency ratings, and future cash flows; and our intent and ability to hold the investment for a period of time sufficient to allow
for any anticipated recovery in fair value. Our assessment that an investment is not other-than-temporarily impaired could change in the
future due to new developments or changes in any particular investment.
The fair value of our portfolio was based on quoted market prices, which we currently believe are indicative of fair value. We will
continue to evaluate whether the inputs are market observable as we implement SFAS No. 157, Fair Value Measurements ("SFAS 157").
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