HP 2006 Annual Report Download - page 109

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the
change in fair value of the hedged debt and investments with the change in fair value of the derivative.
For interest rate swaps designated as cash flow hedges, HP measures effectiveness by offsetting the
change in the variable portion of the interest rate swaps with the changes in expected interest income
received due to the fluctuations in the LIBOR based interest rate. For foreign currency option and
forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by
comparing the cumulative change in the hedge contract with the cumulative change in the hedged item,
both of which are based on forward rates. HP recognizes any ineffective portion of the hedge, as well
as amounts not included in the assessment of effectiveness, in the Consolidated Statements of Earnings.
As of October 31, 2006, the portion of hedging instruments’ gains or losses excluded from the
assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge
ineffectiveness for fair value, cash flow and net investment hedges was not material in the fiscal years
ended October 31, 2006, 2005 and 2004.
HP estimates the fair values of derivatives based on quoted market prices or pricing models using
current market rates and records all derivatives on the balance sheet at fair value. The gross notional
and fair market value of derivative financial instruments and the respective SFAS 133 classification on
the Consolidated Balance Sheets were as follows for the following fiscal years ended October 31:
2006
Long-term
Financing
Other Receivables Other
Gross Current and Accrued Other
Notional Assets Other Assets Liabilities Liabilities Total
In millions
Fair value hedges .................. $ 2,550 $ 1 $ 2 $ (1) $ (3) $ (1)
Cash flow hedges .................. 8,768 33 — (97) — (64)
Net investment hedges .............. 844 1 1 (8) (7) (13)
Other derivatives .................. 10,482 25 13 (135) (28) (125)
Total ........................... $22,644 $60 $16 $(241) $(38) $(203)
2005
Long-term
Financing
Other Receivables Other
Gross Current and Accrued Other
Notional Assets Other Assets Liabilities Liabilities Total
In millions
Fair value hedges ................... $ 2,725 $ 10 $— $ — $(37) $(27)
Cash flow hedges ................... 7,813 52 1 (76) (3) (26)
Net investment hedges ............... 827 4 — (13) — (9)
Other derivatives ................... 12,580 88 24 (91) (8) 13
Total ............................ $23,945 $154 $25 $(180) $(48) $(49)
105