Microsoft 2011 Annual Report Download - page 54

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54
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities.
We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to
certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-
counter swap and option contracts, none of which are designated as hedging instruments. As of June 30, 2011,
the total notional amounts of fixed-interest rate contracts purchased and sold were $2.3 billion and $2.2 billion,
respectively. As of June 30, 2010, the total notional amounts of fixed-interest rate contracts purchased and sold
were $3.1 billion and $1.8 billion, respectively. In addition, we use “To Be Announced” forward purchase
commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet
the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest
available delivery date. As of June 30, 2011 and 2010, the total notional derivative amount of mortgage contracts
purchased were $868 million and $305 million, respectively.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit
default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-
based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low cost method
of managing exposure to individual credit risks or groups of credit risks. As of June 30, 2011, the total notional
amounts of credit contracts purchased and sold were $532 million and $277 million, respectively. As of June 30,
2010, the total notional amounts of credit contracts purchased and sold were $371 million and $199 million,
respectively.
Commodity
We use broad-based commodity exposures to enhance portfolio returns and to facilitate portfolio diversification.
We use swap, futures and option contracts, not designated as hedging instruments, to generate and manage
exposures to broad-based commodity indices. We use derivatives on commodities as they can be low-cost
alternatives to the purchase and storage of a variety of commodities, including, but not limited to, precious metals,
energy, and grain. As of June 30, 2011, the total notional amounts of commodity contracts purchased and sold
were $1.9 billion and $502 million, respectively. As of June 30, 2010, the total notional amounts of commodity
contracts purchased and sold were $1.1 billion and $376 million, respectively.
Credit Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and
outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain a
minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post
collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2011, our
long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no
collateral was required to be posted.
Fair Values of Derivative Instruments
Following are the gross fair values of derivative instruments designated as hedging instruments (“designated
hedge derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”) that were
held at June 30, 2011 and 2010. The fair values exclude the impact of netting derivative assets and liabilities
when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit
risk and counterparty credit risk.
(In millions)
Foreign
Exchange
Contracts
Equity
Contracts
Interest
Rate
Contracts
Credit
Contracts Commodity
Contracts
Total
Derivatives
June 30, 2011
Assets
Non-designated hedge derivatives:
Short-term investments $ 14 $ 179 $ 0 $ 17 $ 4 $ 214
Other current assets 73 0 0 0 0 73
Total $ 87 $ 179 $ 0 $ 17 $ 4 $ 287