Microsoft 2015 Annual Report Download - page 40

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39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS
We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, equity prices, and
commodity prices. A portion of these risks is hedged, but they may impact our consolidated financial statements.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign
currency exposures daily and use hedges where practicable to offset the risks and maximize the economic
effectiveness of our foreign currency positions. Principal currencies hedged include the euro, Japanese yen, British
pound, Canadian dollar, and Australian dollar.
Interest Rate
Our fixed-income portfolio is diversified across credit sectors and maturities, consisting primarily of investment-grade
securities. The credit risk and average maturity of the fixed-income portfolio is managed to achieve economic returns
that correlate to certain global and domestic fixed-income indices. In addition, we use “To Be Announced” forward
purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities.
Equity
Our equity portfolio consists of global, developed, and emerging market securities that are subject to market price
risk. We manage the securities relative to certain global and domestic indices and expect their economic risk and
return to correlate with these indices.
Commodity
We use broad-based commodity exposures to enhance portfolio returns and facilitate portfolio diversification. Our
investment portfolio has exposure to a variety of commodities, including precious metals, energy, and grain. We
manage these exposures relative to global commodity indices and expect their economic risk and return to correlate
with these indices.
VALUE-AT-RISK
We use a value-at-risk (“VaR”) model to estimate and quantify our market risks. VaR is the expected loss, for a given
confidence level, in the fair value of our portfolio due to adverse market movements over a defined time horizon. The
VaR model is not intended to represent actual losses in fair value, including determinations of other-than-temporary
losses in fair value in accordance with U.S. GAAP, but is used as a risk estimation and management tool. The
distribution of the potential changes in total market value of all holdings is computed based on the historical
volatilities and correlations among foreign exchange rates, interest rates, equity prices, and commodity prices,
assuming normal market conditions.
The VaR is calculated as the total loss that will not be exceeded at the 97.5 percentile confidence level or,
alternatively stated, the losses could exceed the VaR in 25 out of 1,000 cases. Several risk factors are not captured
in the model, including liquidity risk, operational risk, and legal risk.
The following table sets forth the one-day VaR for substantially all of our positions as of June 30, 2015 and 2014 and
for the year ended June 30, 2015:
(In millions)
June 30,
2015
June 30,
2014
Y
ear Ended June 30,
2015
Risk Categories Average
High Low
Foreign currency $ 120 $ 179 $ 162 $ 200 $ 107
Interest rate $51 $73 $ 57 $74 $ 48
Equity $149 $176 $ 161 $178 $ 146
Commodity $13 $17 $ 16 $20 $ 11