Intel 2005 Annual Report Download - page 50
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Table of Contents
We are exposed to financial market risks, including changes in currency exchange rates, interest rates and marketable equity security prices. To
mitigate these risks, we may utilize derivative financial instruments, among other strategies. 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 31,
2005 and December 25, 2004. Actual results may differ materially.
Currency Exchange Rates
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 incur certain operating
costs 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 balance sheet and forecasted transaction risk management
programs. Currency forward contracts and currency options are generally 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 all 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 $30 million at the end of 2005 and 2004.
Interest Rates
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 our investments in fixed-rate debt securities are generally based on three-month LIBOR, or, if longer term, are
generally swapped to U.S. dollar LIBOR-based returns. In addition to investments, in 2005 we issued additional debt. We considered the historical
volatility of the interest rates experienced in prior years and the duration of our investment portfolio and debt issuances, and determined that it was
reasonably possible that an adverse change of 80 basis points (0.80%), approximately 18% of the rate at the end of 2005, could be experienced in the
near term. A hypothetical 0.80% increase in interest rates, after taking into account hedges and offsetting positions, would have resulted in a decrease
in the fair value of our net investment position of approximately $10 million and $20 million as of the end of 2005 and 2004, respectively.
Marketable Equity Security Prices
We have a portfolio of strategic equity investments that includes marketable strategic equity securities and derivative equity instruments such as
warrants and options, as well as non-
marketable equity investments, which are discussed further below. We invest in companies that develop software,
hardware or services supporting our technologies. These investments help advance our overall goal to be the preeminent provider of silicon chips and
platform solutions to the worldwide digital economy. Our current investment focus areas include helping to enable mobile wireless devices, advance
the digital home, enhance the digital enterprise, advance high-performance communications infrastructures and develop the next generation of silicon
production technologies. Our focus areas tend to develop and change over time due to rapid advancements in the technology field.
Our total marketable portfolio includes marketable strategic equity securities as well as marketable equity securities classified as trading assets. To the
extent that our marketable portfolio of investments continues to have strategic value, we typically do not attempt to reduce or eliminate our market
exposure. For securities that we no longer consider strategic, we evaluate legal, market and economic factors in our decision on the timing of disposal
and whether it is possible and appropriate to hedge the equity market risk. We may or may not enter into transactions to reduce or eliminate the market
risks of our investments in strategic equity derivatives, including warrants.
The marketable equity securities included in trading assets, as well as certain equity derivatives, are held to generate returns that generally offset
changes in liabilities related to the equity market risk of certain deferred compensation arrangements. The gains and losses from changes in fair value
of these equity securities are generally offset by the gains and losses on the related liabilities, resulting in a net exposure of less than $10 million as of
both December 31, 2005 and December 25, 2004, assuming a reasonably possible decline in market prices of approximately 11% in the near term.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK