HP 2011 Annual Report Download - page 117

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
or hedges of the foreign currency exposure of a net investment in a foreign operation (‘‘net investment
hedges’’). Additionally, for derivatives not designated as hedging instruments, HP categorizes those
economic hedges as other derivatives. HP recognizes all derivatives, on a gross basis, in the
Consolidated Balance Sheets at fair value and reports them in Other current assets, Long-term
financing receivables and other assets, Other accrued liabilities, or Other liabilities. HP classifies cash
flows from the derivative programs as operating activities in the Consolidated Statements of Cash
Flows.
As a result of the use of derivative instruments, HP is exposed to the risk that counterparties to
derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit
risk, HP has a policy of only entering into contracts with carefully selected major financial institutions
based upon their credit ratings and other factors, and HP maintains dollar risk limits that correspond
to each institution’s credit rating and other factors. HP’s established policies and procedures for
mitigating credit risk on principal transactions and short-term cash include reviewing and establishing
limits for credit exposure and continually assessing the creditworthiness of counterparties. Master
agreements with counterparties include master netting arrangements as further mitigation of credit
exposure to counterparties. These arrangements permit HP to net amounts due from HP to a
counterparty with amounts due to HP from the same counterparty.
To further mitigate credit exposure to counterparties, HP may enter into collateral security
arrangements with its counterparties. These arrangements require HP to post collateral or to hold
collateral from counterparties when the derivative fair values exceed contractually established
thresholds which are generally based on the credit ratings of HP and its counterparties. Such funds are
generally transferred within two business days. As of October 31, 2011, HP had posted $96 million
associated with the counterparties under these collateralized arrangements. Collateral amounts as of
October 31, 2010 were not material.
Fair Value Hedges
HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk.
HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses
interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve
primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve
principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose
not to swap fixed for floating interest payments or may terminate a previously executed swap if it
believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate
instruments, HP may enter into interest rate swaps that convert the fixed interest returns into variable
interest returns and would classify these swaps as fair value hedges. For derivative instruments that are
designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative
instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other, net in the
Consolidated Statements of Earnings in the current period.
Cash Flow Hedges
HP 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 net revenue and, to a lesser
extent, cost of sales, operating expense, and intercompany lease loan denominated in currencies other
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