IBM 2002 Annual Report Download - page 87

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Notes to Consolidated Financial Statements
85international business machines corporation and Subsidiary Companies
Subsidiary Cash and Foreign Currency
Asset/Liability Management
The company uses its Global Treasury Centers to manage the
cash of its subsidiaries. These centers principally use currency
swaps to convert cash flows in a cost-effective manner. In
addition, the company uses foreign exchange forward contracts
to hedge, on a net basis, the foreign currency exposure of a
portion of the company’s non-functional currency assets and
liabilities. The terms of these forward and swap contracts are
generally less than one year. The changes in fair value from
these contracts and from the underlying hedged exposures
are generally offsetting and are recorded in Other (income)
and expense in the Consolidated Statement of Earnings.
Equity Risk Management
The company is exposed to certain equity price changes related
to certain obligations to employees. These equity exposures
are primarily related to market value movements in certain
broad equity market indices and in the company’s own stock.
Changes in the overall value of this employee compensation
obligation are recorded in SG&A expense in the Consolidated
Statement of Earnings. Although not designated as accounting
hedges, the company utilizes equity derivatives, including
equity swaps and futures to economically hedge the equity
exposures relating to this employee compensation obligation.
To match the exposures relating to this employee compensa-
tion obligation, these derivatives are linked to the total return
of certain broad equity market indices and/or the total return
of the company’s common stock. These derivatives are
recorded at fair value with gains or losses also reported in
SG&A expense in the Consolidated Statement of Earnings.
Other Derivatives
The company holds warrants in connection with certain
investments that, although not designated as hedging instru-
ments, are deemed derivatives since they contain net share
settlement clauses. During the year, the company recorded
the change in the fair value of these warrants in net income.
The following tables summarizes the net fair value of the
company’s derivative and other risk management instruments
at December 31, 2002 and 2001 (included in the Consolidated
Statement of Financial Position).
risk management program
hedge designation
(dollars in millions) net non-hedge/
at december 31, 2002 fair value cash flow investment other
Derivatives:
Debt risk management $«643 $«««««(7) $«««««««— $«««««3
Long-term investments in foreign subsidiaries (“net investments”) —— 2—
Anticipated royalties and cost transactions —«««(469) — —
Subsidiary cash and foreign currency asset/liability management ———«(109)
Equity risk management ——— «6
Other derivatives ———10
Total derivatives «643(a) «(476) (b) 2(c) «(90) (d)
Debt:
Long-term investments in foreign subsidiaries (“net investments”) ——(2,474) *—
Total $«643 $«(476) $«(2,472) $««(90)
*Represents fair value of foreign denominated debt issuances formally designated as a hedge of net investment.
(a) Comprises assets of $754 million and liabilities of $111 million.
(b) Comprises assets of $2 million and liabilities of $478 million.
(c) Comprises assets of $2 million.
(d) Comprises assets of $26 million and liabilities of $116 million.