Intel 2002 Annual Report Download - page 36

To mitigate these risks, we utilize derivative financial instruments, among other strategies. Other than warrants and other equity derivatives that
we acquired for strategic purposes, we do not use derivative financial instruments for speculative purposes. All of the potential changes noted
below are based on sensitivity analyses performed on our financial positions at December 28, 2002. Actual results may differ materially.
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We generally hedge currency risks of non-U.S. dollar-denominated investments in debt securities with offsetting currency borrowings,
currency forward contracts or currency interest rate swaps. Gains and losses on these non-U.S.-currency investments would generally be offset
by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure.
A substantial majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into
these transactions in other currencies, primarily the Euro and certain other European and Asian currencies. To protect against reductions in value
and the volatility of future cash flows caused by changes in currency exchange rates, we have established transaction and balance sheet hedging
programs. Currency forward contracts and currency options are utilized in these hedging programs. Our hedging programs reduce, but do not
always entirely eliminate, the impact of currency exchange rate movements. We considered the historical trends in currency exchange rates and
determined that it was reasonably possible that adverse changes in exchange rates of 20% for the Euro and certain other European, Asian and
South American currencies and 10% for all other currencies could be experienced in the near term. Such adverse changes, after taking into
account hedges and offsetting positions, would have resulted in an adverse impact on income before taxes of less than $10 million as of the end
of each of 2002 and 2001.
The primary objective of our investments in debt securities is to preserve principal while maximizing yields, without significantly
increasing risk. To achieve this objective, the returns on a substantial majority of our marketable investments in long-term fixed rate debt
securities are swapped to U.S. dollar LIBOR-based returns. We considered the historical volatility of the three-
month LIBOR rate experienced in
the past year and determined that it was reasonably possible that an adverse change of 80 basis points, approximately 57% of the rate at the end
of 2002, could be experienced in the near term. A hypothetical 0.80% (80-basis-point) increase in interest rates, after taking into account hedges
and offsetting positions, would have resulted in a less than $5 million decrease in the fair value of our investments in debt securities as of the end
of 2002 and an approximate $10 million decrease as of the end of 2001.
We have a portfolio of equity investments that includes marketable securities classified as either long-term investments or trading assets, as
well as derivative equity instruments such as warrants and options. To the extent that these investments continue to have strategic value, we
typically do not attempt to reduce or eliminate our market exposure. For those securities that are no longer considered strategic, management will
evaluate market and economic factors in its decision on the timing of disposal and whether it is possible and appropriate to hedge the equity
market risk. Our investments are generally in companies in the high-technology industry, and a substantial majority of the market value of the
portfolio is in two sectors: computing and communications, including networking and storage companies. As of December 28, 2002, the fair
value of the company's portfolio of marketable equity securities and equity derivative instruments, including hedging positions, was
$335 million.
We analyzed the historical movements over the past several years of high-technology stock indices that we considered appropriate. Based
on the analysis, we estimated that it was reasonably possible that the prices of the stocks in our portfolio could experience a 30% adverse change
in the near term. Assuming a 30% adverse change in market prices, and after reflecting the impact of hedges and offsetting positions, our
portfolio would decrease in value by approximately $30 million, based on the value of the portfolio as of December 28, 2002 (a decrease in
value of $70 million based on the portfolio as of the end of 2001). This estimate is not necessarily indicative of future performance, and actual
results may differ materially. The marketable portfolio is substantially concentrated in a small number of companies, which may affect the
portfolio's price volatility; however, the majority of the portfolio's value is hedged.
An adverse movement of equity market prices would also have an impact on our strategic investments in non-marketable equity securities,
although the impact cannot be directly quantified. Such a movement and the related underlying economic conditions would negatively affect the
prospects of the companies we invest in, their ability to raise additional capital and the likelihood of our being able to realize our investments
through liquidity events such as initial public offerings, mergers and private sales. At December 28, 2002, our strategic investments in non-
marketable equity securities had a carrying amount of $730 million, excluding equity derivatives that are subject to mark-to-market
requirements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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