HP 2007 Annual Report Download - page 123

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
an unrecognized net loss on net investment hedges of $109 million and $31 million for the fiscal years ended October 31,
2007 and 2006, respectively.
Other Derivatives
Other derivatives not designated as hedging instruments under SFAS 133 consist primarily of forward contracts HP uses
to hedge foreign currency balance sheet exposures. For derivative instruments not designated as hedging instruments under
SFAS 133, HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gains or losses on
foreign currency forward contracts used to hedge balance sheet exposures in interest and other, net in the same period as the
remeasurement gain and loss of the related foreign currency denominated assets and liabilities. Interest and other, net,
included net foreign currency exchange gains of approximately $86 million in fiscal 2007, gains of approximately
$54 million in fiscal 2006, and gains of approximately $70 million in fiscal 2005.
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, 2007, 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,
2007, 2006 and 2005.
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
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