SanDisk 2013 Annual Report Download - page 161

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates and foreign currency
exchange rates.
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. As of December 29, 2013, a hypothetical 50 basis
point increase in interest rates would result in an approximate $35 million decline (less than 0.70%) of the
fair value of our available-for-sale debt securities.
Foreign Currency Risk. The majority of our revenue is transacted in the U.S. dollar, with some revenue
transacted in the European euro, the British pound, the Japanese yen, the Chinese renminbi and the
Canadian dollar. Our flash memory costs, which represent the largest portion of our cost of revenue, are
denominated in Japanese yen. We also have some cost of revenue denominated in the Chinese renminbi
and the Malaysian ringgit. The majority of our operating expenses are denominated in the U.S. dollar;
however, we have expenses denominated in Japanese yen, the Chinese renminbi, 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 balances with Flash Ventures,
which are denominated in Japanese yen.
We enter into foreign exchange forward and cross currency swap contracts 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 exchange forward contracts to partially hedge future Japanese yen wafer purchases
and to partially hedge future Japanese yen R&D expenses. 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 AOCI and subsequently reclassified to cost of revenue or R&D expenses in the same
period the hedged cost of revenue or R&D expenses are recognized.
At December 29, 2013, we had foreign exchange forward contracts in place that amounted to a net
purchase in U.S. dollar equivalents of $87 million in foreign currencies to hedge our foreign currency
denominated monetary net liability position over the next twelve months. The notional amount and
unrealized loss of our outstanding foreign exchange forward contracts that are non-designated (balance
sheet hedges) as of December 29, 2013, based upon the exchange rate as of December 29, 2013, are shown
in the table below. In addition, this table shows the change in fair value of these balance sheet hedges
assuming a hypothetical adverse foreign currency exchange rate movement of 10 percent. These changes in
fair values would be largely offset in other income (expense) by corresponding changes in the fair values of
the foreign currency denominated monetary assets and liabilities.
Change in Fair
Value Due to 10%
Notional Unrealized Adverse Rate
Amount Loss Movement
(In millions)
Balance sheet hedges:
Forward contracts sold ....................... $ (98.7) $ (0.2) $ (3.1)
Forward contracts purchased ................... 185.2 (6.4) (9.7)
Total net outstanding contracts ................ $ 86.5 $ (6.6) $ (12.8)
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