VMware 2014 Annual Report Download - page 60

Table of Contents
The Company has not selected a transition method and is currently evaluating the effect that the updated standard will have on its
consolidated financial statements and related disclosures.
Foreign Exchange Risk
We operate in foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations between the
U.S. dollar and various foreign currencies, the most significant of which is the euro.
Although approximately 70% of our sales are denominated in the U.S. dollar, we also invoice and collect in the euro, the British pound, the
Japanese yen, the Australian dollar and the Chinese renminbi in their respective regions. As a result, a portion of our total revenues are affected
by changes in the value of the U.S. dollar against these currencies. Additionally, a portion of our operating expenses, primarily the cost of
personnel to deliver technical support on our products and professional services, sales and sales support and research and development, are
denominated in foreign currencies, primarily those currencies in which we also invoice and collect. Revenues resulting from selling in local
currencies and costs incurred in local currencies are exposed to foreign exchange rate fluctuations which can affect our operating income. As
exchange rates vary, operating results may differ materially from expectations. We calculate the foreign currency impact on our revenues and
operating expenses as the difference between amounts translated at current exchange rates and the same amounts translated at prior-period
exchange rates.
To manage the risk associated with fluctuations in foreign currency exchange rates, we utilize derivative financial instruments, principally
foreign currency forward contracts, as described below.
Cash Flow Hedging Activities. To mitigate our exposure to foreign currency fluctuations resulting from operating expenses denominated in
certain foreign currencies, we enter into foreign currency forward contracts. We typically enter into cash flow hedges annually with maturities
of 12 months or less. As of December 31, 2014 and 2013 , we had foreign currency forward contracts to purchase approximately
$240 million
and $82 million , respectively, in foreign currency. The fair value of these forward contracts was immaterial as of December 31, 2014 and
2013 .
Foreign Currency Forward Contracts Not Designated as Hedges. We enter into foreign currency forward contracts to hedge a portion of
our net outstanding monetary assets and liabilities against movements in certain foreign exchange rates. Our foreign currency forward contracts
are traded on a monthly basis with a typical contractual term of one month. As of December 31, 2014 and 2013 , we had outstanding forward
contracts with a total notional value of $697 million and $498 million , respectively. The fair value of these forward contracts was
immaterial as of December 31, 2014 and 2013 .
Sensitivity Analysis. There can be no assurance that our hedging activities will adequately protect us against the risks associated with
foreign currency fluctuations. A hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a potential loss
of $85 million in fair value of our foreign currency forward contracts as of December 31, 2014 . This sensitivity analysis disregards any
offsetting gain that may be associated with the underlying foreign-currency denominated assets and liabilities that we hedge.
This analysis also assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, foreign currency
exchange rates do not always move in such a manner and actual results may differ materially. We do not, and do not intend to use derivative
financial instruments for speculative purposes. Refer to Note G to the consolidated financial statements in Part II, Item 8 of this Annual Report
on Form 10-K for further information.
Interest Rate Risk
Fixed Income Securities
Our fixed income investment portfolio is denominated in U.S. dollars and consists of various holdings, types, and maturities.
Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal
and managing risk. At any time, a sharp rise in interest rates or credit spreads could have a material adverse impact on the fair value of our fixed
income investment portfolio. Hypothetical increases in interest rates of 50 basis points and 100 basis points would have decreased the fair value
of our fixed income investment portfolio as of December 31, 2014 by $33 million and $66 million , respectively. Hypothetical decreases in
interest rates of 50 basis points and 100 basis points would have increased the fair value of our fixed income investment portfolio as of
December 31, 2014 by $31 million and $55 million , respectively. This sensitivity analysis assumes a parallel shift of all interest rates; however,
interest rates do not always move in such a manner and actual results may differ materially. We monitor our interest rate and credit risk,
including our credit exposures to specific rating categories and to individual issuers. These instruments are not leveraged and we do not intend to
use them for speculative purposes. Refer to Notes E and F to the consolidated financial statements in Part II, Item 8 of this Annual Report on
Form 10-K for further information.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK