Dell 2007 Annual Report Download - page 65

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Instruments
As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and options, to hedge certain
foreign currency exposures. Dell's objective is to offset gains and losses resulting from these exposures with gains and losses on the
derivative contracts used to hedge them, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Dell
does not use derivative contracts for speculative purposes. Dell applies hedge accounting based upon the criteria established by
SFAS 133, whereby Dell designates its derivatives as fair value hedges or cash flow hedges. Dell estimates the fair values of derivatives
based on quoted market prices or pricing models using current market rates and records all derivatives in the Consolidated Statements of
Financial Position at fair value.
Cash Flow Hedges
Dell uses a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange
rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with
purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal
to the exchange rate differential from the time the contract is entered into until the time it is settled. These contracts typically expire in
12 months or less. For derivative instruments that are designated and qualify as cash flow hedges, Dell records the effective portion of the
gain or loss on the derivative instrument in accumulated other comprehensive income (loss) as a separate component of stockholders'
equity and reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. Dell
reports the effective portion of cash flow hedges in the same financial statement line item, within earnings, as the changes in value of the
hedged item.
For foreign currency option and forward contracts designated as cash flow hedges, Dell assesses hedge effectiveness both at the onset of
the hedge as well as at the end of each fiscal quarter throughout the life of the derivative. Dell measures hedge ineffectiveness by
comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of the hedged item,
both of which are based on forward rates. Dell recognizes any ineffective portion of the hedge, as well as amounts not included in the
assessment of effectiveness, currently in earnings as a component of investment and other income, net. Hedge ineffectiveness for cash
flow hedges was not material for Fiscal 2008, 2007 and 2006. During Fiscal 2008, 2007, and 2006, Dell did not discontinue any cash
flow hedges that had a material impact on Dell's results of operations as substantially all forecasted foreign currency transactions were
realized in Dell's actual results.
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