EMC 2008 Annual Report Download - page 47

Table of Contents
retroactively revise all periods presented. FSP APB 14-1 is effective for financial statements for fiscal years ended after December 15, 2008, and early
adoption is not permitted. We adopted FSP APB 14-1 on January 1, 2009.
For financial statements for periods after January 1, 2009, we will revise prior period financial statements by reclassifying $669.1 of our Notes to
additional paid-in capital. Our interest expense will increase by $11.5 for 2006 (the year the Notes were issued), $96.9 for 2007 and $102.6 in 2008. Our
diluted earnings per share will decrease by $0.0 for 2006 and $0.03 for each of 2007 and 2008.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk, primarily from changes in foreign exchange rates, interest rates and credit risk. To manage the volatility relating to
foreign exchange risk, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures.
Foreign Exchange Risk Management
As a multinational corporation, we are exposed to changes in foreign exchange rates. Any foreign currency transaction, defined as a transaction
denominated in a currency other than the U.S. dollar, will be reported in U.S. dollars at the applicable exchange rate. Assets and liabilities are translated into
U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the period. The primary
foreign currency denominated transactions include revenue and expenses and the resultant accounts receivable and accounts payable balances reflected on our
balance sheet. Therefore, the change in the value of the U.S. dollar as compared to foreign currencies will have either a positive or negative effect on our
financial position and results of operations. We enter into derivative contracts with the sole objective of decreasing the volatility of the impact of currency
fluctuations. These exposures may change over time and could have a material adverse impact on our financial results. Historically, our primary exposure has
related to sales denominated in the Euro, the Japanese yen and the British pound. Additionally, we have exposure to emerging market economies, particularly
in Latin America and Southeast Asia.
We use foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. In all cases, we use these derivative instruments
to reduce our foreign exchange risk by essentially creating offsetting market exposures. The success of the hedging program depends on our forecasts of
transaction activity in the various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could
experience unanticipated currency gains or losses. The instruments we hold are not leveraged and are not held for trading or speculative purposes.
We employ a Monte Carlo simulation model to calculate value-at-risk for our combined foreign exchange position. This model assumes that the
relationships among market rates and prices that have been observed daily over the last two years are valid for estimating risk over the next trading day.
Estimates of volatility and correlations of market factors are calculated by Measurisk as of December 31, 2008. This model measures the potential loss in fair
value that could arise from changes in market conditions, using a 95% confidence level and assuming a one-day holding period. The value-at-risk on the
combined foreign exchange position was $1.4 million as of December 31, 2008 and $1.0 million as of December 31, 2007. The average, high and low value-
at-risk amounts for 2008 and 2007 were as follows (in millions):
Average High Low
2008 $ 1.3 $1.7 $0.5
2007 $ 0.8 $1.0 $0.6
The average value represents an average of the quarter-end values. The high and low valuations represent the highest and lowest values of the quarterly
amounts.
Interest Rate Risk
We maintain an investment portfolio consisting of debt securities of various types and maturities. The investments are classified as available for sale and
are all denominated in U.S. dollars. These securities are recorded on the balance sheet at market value, with any unrealized gain or temporary loss recorded in
other comprehensive loss. These instruments are not leveraged and are not held for trading purposes.
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