Oracle 2010 Annual Report Download - page 79

Table of Contents
Changes in the overall level of interest rates affect the interest income that is generated from our cash, cash equivalents and marketable securities. For fiscal
2011, total interest income was $163 million with our investments yielding an average 0.62% on a worldwide basis. The table below presents the fair value of our
cash, cash equivalent and marketable securities and the related weighted average interest rates for our investment portfolio at May 31, 2011 and 2010.
May 31,
2011 2010
(Dollars in millions) Fair Value
Weighted
Average
Interest
Rate Fair Value
Weighted
Average
Interest
Rate
Cash and cash equivalents $ 16,163 0.61% $ 9,914 0.75%
Marketable securities 12,685 0.68% 8,555 0.46%
Total cash, cash equivalents and marketable securities $ 28,848 0.64% $ 18,469 0.62%
Interest Expense Risk
Our total borrowings were $15.9 billion as of May 31, 2011, primarily all of which were fixed rate borrowings. Future changes in interest rates and resulting
changes in estimated fair values of our borrowings other than our senior notes due July 2014 (2014 Notes) and short-term borrowings pursuant to our 2011 Credit
Agreements would not impact the interest expense we recognize in our consolidated statements of operations. We have entered into certain fixed to variable
interest rate swap agreements to manage the interest rate and related fair value of our 2014 Notes so that the interest payable on the 2014 Notes effectively
became variable based on LIBOR. We do not use these interest rate swap arrangements or our fixed rate borrowings for trading purposes. We have designated
these swap agreements as qualifying instruments and are accounting for them as fair value hedges pursuant to ASC 815, Derivatives and Hedging. These
transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair values of our 2014 Notes
due to interest rate movements. The changes in fair values of these interest rate swap agreements will be recognized as interest expense in our consolidated
statements of operations with the corresponding amounts included in other assets or other non-current liabilities in our consolidated balance sheets. The amount
of net gain (loss) attributable to the risk being hedged is recognized as interest expense in our consolidated statements of operations with the corresponding
amount included in notes payable and other non-current borrowings. The periodic interest settlements, which occur at the same intervals as the 2014 Notes, are
recorded as interest expense.
By entering into these interest rate swap arrangements, we have assumed risks associated with variable interest rates based upon LIBOR. Our 2014 Notes had an
effective interest rate of 1.38% as of May 31, 2011, after considering the effects of the aforementioned interest rate swap arrangements. Changes in the overall
level of interest rates affect the interest expense that we recognize in our statements of operations. An interest rate risk sensitivity analysis is used to measure
interest rate risk by computing estimated changes in cash flows as a result of assumed changes in market interest rates. As of May 31, 2011, if LIBOR-based
interest rates increased by 100 basis points, the change would increase our interest expense annually by approximately $15 million as it relates to our fixed to
variable interest rate swap agreements.
Foreign Currency Risk
Foreign Currency Transaction Risk
We transact business in various foreign currencies and are subject to risks associated with the effects of certain foreign currency exposures. We have a program
that primarily utilizes foreign currency forward contracts to offset these risks. We may suspend this program from time to time and did so during the fourth
quarter of fiscal 2010 until resuming the program in the second quarter of fiscal 2011. We enter into foreign currency forward contracts so that increases or
decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility
associated with our foreign
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Source: ORACLE CORP, 10-K, June 28, 2011 Powered by Morningstar® Document Research℠