IBM 2012 Annual Report Download - page 63

6262 Management Discussion
International Business Machines Corporation and Subsidiary Companies
Market Risk
In the normal course of business, the financial position of the
company is routinely subject to a variety of risks. In addition to the
market risk associated with interest rate and currency movements
on outstanding debt and non-U.S. dollar denominated assets and
liabilities, other examples of risk include collectibility of accounts
receivable and recoverability of residual values on leased assets.
The company regularly assesses these risks and has established
policies and business practices to protect against the adverse
effects of these and other potential exposures. As a result, the com-
pany does not anticipate any material losses from these risks.
The company’s debt, in support of the Global Financing business
and the geographic breadth of the company’s operations, contains
an element of market risk from changes in interest and currency
rates. The company manages this risk, in part, through the use of a
variety of financial instruments including derivatives, as described
in note D, “Financial Instruments,” on pages 94 to 98.
To meet disclosure requirements, the company performs a sen-
sitivity analysis to determine the effects that market risk exposures
may have on the fair values of the company’s debt and other finan-
cial instruments.
The financial instruments that are included in the sensitivity
analysis comprise all of the company’s cash and cash equivalents,
marketable securities, short-term and long-term loans, commercial
financing and installment payment receivables, investments, long-
term and short-term debt and all derivative financial instruments.
The company’s derivative financial instruments generally include
interest rate swaps, foreign currency swaps and forward contracts.
To perform the sensitivity analysis, the company assesses the
risk of loss in fair values from the effect of hypothetical changes in
interest rates and foreign currency exchange rates on market-sen-
sitive 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 foreign currency exchange rates in
effect at December 31, 2012 and 2011. The differences in this com-
parison are the hypothetical gains or losses associated with each
type of risk.
Information provided by the sensitivity analysis does not neces-
sarily represent the actual changes in fair value that the company
would incur under normal market conditions because, due to practi-
cal limitations, all variables other than the specific market risk factor
are held constant. In addition, the results of the model are con-
strained 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 short-term and long-term receivables from sales-type and
direct financing leases, forecasted foreign currency cash flows and
the company’s net investment in foreign operations. As a conse-
quence, 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, 2012 and
2011, are as follows:
Interest Rate Risk
At December 31, 2012, 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
$192 million as compared with a decrease of $310 million at Decem-
ber 31, 2011. A 10 percent increase in the levels of interest rates with
all other variables held constant would result in an increase in the
fair value of the company’s financial instruments of $181 million as
compared to an increase of $290 million at December 31, 2011.
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 com-
pany’s debt maturities, interest rate profile and amount.
Foreign Currency Exchange Rate Risk
At December 31, 2012, a 10 percent weaker U.S. dollar against for-
eign currencies, with all other variables held constant, would result
in an increase in the fair value of the company’s financial instruments
of $1,203 million as compared with an increase of $1,303 million at
December 31, 2011. Conversely, a 10 percent stronger 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 $1,203 million compared with a decrease of $1,303
million at December 31, 2011. The change in impact from 2011 to
2012 was comprised of: assets ($84 million), debt ($216 million) and
derivatives ($202 million).
Financing Risks
See the “Description of Business” on page 24 for a discussion of
the financing risks associated with the Global Financing business
and management’s actions to mitigate such risks.
Cybersecurity
While neither a business unit nor a worldwide organization, the com-
pany’s approach on cybersecurity demonstrates its ability to adapt
to a changing environment, as well as the depth and breadth of its
global capabilities. IBM has leveraged its extensive knowledge and
experience on cybersecurity matters to help its customers. The
company has a suite of software solutions that showcase IBM’s
broad capabilities in identity and access management, data security,
application security, network security and endpoint security. IBM’s
software solutions include a security intelligence dashboard that
can collect information on customer IT security events and provide
detailed information to customers about potential threats and secu-
rity posture. The company’s services businesses offer professional
solutions for security from assessment to deployment. In addition, the
company offers managed and outsourced security solutions from
multiple security operations centers around the world. Finally, security
is embedded in a multitude of IBM offerings through secure engineer-
ing processes and by critical functions (encryption, access control,
etc.) in servers, storage, software, services and other solutions.