IBM 2006 Annual Report Download - page 50

MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHIN ES CORPORATION AND SUBSI DIARY COMPANIES
48 2006 Annual Report
The financial instruments that are included in the sensitivity
analysis comprise all of the company’s cash and cash equivalents, mar-
ketable securities, long-term non-lease receivables, investments, long-
term and short-term debt and all derivative financial instruments.
The company’s portfolio of derivative financial instruments generally
includes interest rate swaps, foreign currency swaps, forward con-
tracts and option contracts.
To perform the sensitivity analysis, the company assesses the risk
of loss in fair values from the effect of hypothetical changes in inter-
est rates and foreign currency exchange rates on market-sensitive
instruments. The market values for interest and foreign currency
exchange risk are computed based on the present value of future cash
flows as affected by the changes in rates that are attributable to the
market risk being measured. The discount rates used for the present
value computations were selected based on market interest and for-
eign currency exchange rates in effect at December 31, 2006 and
2005. The differences in this comparison are the hypothetical gains
or losses associated with each type of risk.
Information provided by the sensitivity analysis does not necessar-
ily represent the actual changes in fair value that the company would
incur under normal market conditions because, due to practical limi-
tations, all variables other than the specific market risk factor are held
constant. In addition, the results of the model are constrained by the
fact that certain items are specifically excluded from the analysis,
while the financial instruments relating to the financing or hedging of
those items are included by definition. Excluded items include leased
assets, forecasted foreign currency cash flows and the company’s net
investment in foreign operations. As a consequence, reported changes
in the values of some of the financial instruments impacting the
results of the sensitivity analysis are not matched with the offsetting
changes in the values of the items that those instruments are designed
to finance or hedge.
The results of the sensitivity analysis at December 31, 2006, and
December 31, 2005, are as follows:
Interest Rate Risk
At December 31, 2006, a 10 percent decrease in the levels of interest
rates, with all other variables held constant, would result in a decrease
in the fair market value of the company’s financial instruments of $113
million as compared with an increase of $18 million at December 31,
2005. A 10 percent increase in the levels of interest rates with all other
variables held constant would result in a increase in the fair value of
the company’s financial instruments of $96 million as compared to a
decrease of $8 million at December 31, 2005. Changes in the relative
sensitivity of the fair value of the company’s financial instrument
portfolio for these theoretical changes in the level of interest rates are
primarily driven by changes in the company’s debt maturities, interest
rate profile and amount.
Foreign Currency Exchange Rate Risk
At December 31, 2006, a 10 percent weaker U.S. dollar against foreign
currencies, with all other variables held constant, would result in a
decrease in the fair value of the company’s financial instruments of $348
million as compared with a decrease of $257 million at December 31,
2005. Conversely, a 10 percent stronger U.S. dollar against foreign cur-
rencies, with all other variables held constant, would result in an increase
in the fair value of the company’s financial instruments of $330 million
compared with an increase of $278 million at December 31, 2005.
FINANCING RISKS
See the “Global Financing—Description of Business” on page 49 for
a discussion of the financing risks associated with the company’s
Global Financing business and management’s actions to mitigate
such risks while striving for consistently strong returns on Global
Financing’s equity.
EMPLOYEES AND RELATED WORKFORCE
PERCENTAGE CHANGES
FOR THE YEAR ENDED DECEMBER 31: 2006 2005 2004 2006-05 2005-04
IBM/wholly owned subsidiaries , , , . .
Less-than-wholly owned subsidiaries , , , (.) (.)
Complementary , , , . .
Management Discussion ........................................................
Road Map ............................................................................. 
Forward-Looking and Cautionary Statements ..................... 
Management Discussion Snapshot ...................................... 
Description of Business ....................................................... 
Year in Review...................................................................... 
Prior Year in Review ............................................................. 
Discontinued Operations ..................................................... 
Other Information ................................................................ 
Global Financing .................................................................. 
Report of Management .........................................................
Report of Independent Registered Public Accounting Firm ....
Consolidated Statements .......................................................
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