Oracle 2011 Annual Report Download - page 77

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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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