SanDisk 2010 Annual Report Download - page 182

into cost of product revenues in the same period or periods in which the cost of product revenues is recognized.
These foreign currency exchange exposures may change over time as our business and business practices evolve,
and they could harm our financial results and cash flows. See Note 3, “Derivatives and Hedging Activities,” in
the Notes to Consolidated Financial Statements of this Form 10-K included in Part II, Item 8 of this report.
For a discussion of foreign operating risks and foreign currency risks, see Part I, Item 1A, “Risk Factors.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange
rates and marketable equity security prices.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. The primary objective of our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified
investment grade marketable securities. As of January 2, 2011, a hypothetical 50 basis point increase in interest
rates would result in an approximate $31 million decline (less than 0.70%) in the fair value of our
available-for-sale debt securities.
Foreign Currency Risk. The majority of our revenues are transacted in the U.S. dollar, with some revenues
transacted in the European euro, the British pound, and the Japanese yen. Our flash memory costs, which
represent the largest portion of our cost of revenues, are denominated in the Japanese yen. We also have some
cost of revenues denominated in Chinese renminbi. The majority of our operating expenses are denominated in
the U.S. dollar; however, we have expenses denominated in the Israeli new shekel and numerous other
currencies. On the balance sheet, we have numerous foreign currency denominated monetary assets and
liabilities, with the largest monetary exposure being our notes receivable from Flash Ventures, which are
denominated in Japanese yen.
We enter into foreign currency forward contracts and cross currency swaps to hedge the gains or losses
generated by the remeasurement of our significant foreign currency denominated monetary assets and liabilities.
The fair value of these contracts is reflected as other assets or other liabilities and the change in fair value of
these balance sheet hedge contracts is recorded into earnings as a component of other income (expense) to
largely offset the change in fair value of the foreign currency denominated monetary assets and liabilities which
is also recorded in other income (expense).
We use foreign currency forward contracts and option contracts to partially hedge our future Japanese yen
flash memory costs. These contracts are designated as cash flow hedges and are carried on our balance sheet at
fair value with the effective portion of the contracts’ gains or losses included in accumulated OCI and
subsequently recognized in cost of product revenues in the same period the hedged cost of product revenues is
recognized.
At January 2, 2011, we had foreign currency forward and cross currency swap contracts in place that
amounted to a net sale in U.S. dollar equivalent of approximately $305 million in foreign currencies to hedge our
foreign currency denominated monetary net asset position. The maturities of these contracts were 36 months or
less.
At January 2, 2011, we had foreign currency forward exchange contracts in place that amounted to a net
purchase in U.S. dollar equivalent of approximately $843 million in foreign currencies to partially hedge our
expected future wafer purchases in Japanese yen. The maturities of these contracts were 12 months or less.
The notional amount and unrealized gain or loss of our outstanding cross currency swap and foreign
currency forward contracts that are non-designated (balance sheet hedges) as of January 2, 2011 is shown in the
table below. In addition, this table shows the change in fair value of these balance sheet hedges assuming a
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