Dell 2009 Annual Report Download - page 68

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Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During Fiscal 2010, Fiscal 2009, and Fiscal 2008, gross realized gains recognized in interest and other, net were $6 million, $14 million,
and $17 million, respectively. Dell recognized gross realized losses of $4 million, $24 million, and $3 million, respectively, during the
same periods.
Derivative Instruments and Hedging Activities
Derivative Instruments
As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and purchased options, to hedge
certain foreign currency exposures and interest rate swaps to reduce the exposure of its debt portfolio to interest rate risk. 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 applies hedge accounting based upon the criteria
established by accounting guidance for derivative instruments and hedging activities, including designation of its derivatives as fair value
hedges or cash flow hedges and assessing of hedge effectiveness. Dell records all derivatives in its Consolidated Statements of Financial
Position at fair value.
Cash Flow Hedges
Dell uses a combination of forward contracts and purchased 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. The majority of
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) ("OCI")
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 forward contracts and purchased options 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, in earnings as a component of interest and other, net. Hedge ineffectiveness for cash flow
hedges was not material for year ended January 29, 2010. During the year ended January 29, 2010, 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.
The aggregate unrealized net gain recorded as a component of comprehensive income net of tax, for Fiscal 2010 and 2009 was $1 million
and $324 million, respectively. The following table summarizes the fair value of the foreign
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