Xerox 2003 Annual Report Download - page 65

63
2004 2005 2006 2007 Thereafter Total
Single Currency Swaps
Pay fixed/receive variable $167 $112 $12 $ – $ 250 $ 541
Pay variable/receive fixed – – – – 1,950 1,950
Total $167 $112 $12 $ – $2,200 $2,491
Interest rate paid 5.29% 6.46% 6.02% – 4.36% 4.52%
Interest rate received 2.10% 1.96% 2.83% – 7.31% 6.69%
Cross Currency Swaps
Pay fixed/receive fixed $ – $453 $ – $136 $ – $ 589
Pay fixed/receive variable 98 9 – – – 107
Total $ 98 $462 $ – $136 $ – $ 696
Interest rate paid 5.93% 3.37% – 4.69% – 5.31%
Interest rate received 1.15% 1.49% – 2.00% – 2.36%
The majority of the variable portions of our swaps
pay interest based on spreads against LIBOR or the
European Interbank Rate.
Fair Value Hedges: During 2003, pay variable/receive
fixed interest rate swaps with notional amounts of
$700 and $400 associated with the Senior Notes due in
2010 and 2013, respectively, were designated and
accounted for as fair value hedges. During 2002, pay
variable/receive fixed interest rate swaps with a
notional amount of $600 associated with the Senior
Notes due in 2009 were designated and accounted for
as fair value hedges. The swaps were structured to
hedge the fair value of the debt by converting it from a
fixed rate instrument to a variable rate instrument.
Accordingly, no ineffective portion was recorded to
earnings during 2003 or 2002.
We terminated various interest rate swaps with a
fair value of $136 during 2003 and $56 during 2002.
These derivatives were not previously designated as
hedges and, accordingly, the termination had no
impact on earnings.
Derivatives Marked-to-Market Results: While the
remainder of our portfolio of interest rate derivative
instruments is intended to economically hedge inter-
est rate risks to the extent possible, differences
between the contract terms of these derivatives and
the underlying related debt reduce our ability to obtain
hedge accounting in accordance with SFAS No. 133.
This results in mark-to-market valuation of these deriv-
atives directly through earnings, which, accordingly,
leads to increased earnings volatility. During 2003 and
2002, we recorded net losses of $13 and net gains of
$12, respectively, from the mark-to-market valuation
of interest rate derivatives for which we did not apply
hedge accounting.
Foreign Exchange Risk Management:
Currency Derivatives: We utilize forward exchange
contracts and purchased option contracts to hedge
against the potentially adverse impacts of foreign cur-
rency fluctuations on foreign currency denominated
assets and liabilities including foreign currency-
denomination debt. Changes in the value of these cur-
rency derivatives are recorded in earnings together
with the offsetting foreign exchange gains and losses
on the underlying assets and liabilities.
We also utilize currency derivatives to hedge antic-
ipated transactions, primarily forecasted purchases of
foreign-sourced inventory and foreign currency lease,
interest and other payments. These contracts general-
ly mature in six months or less. Although these con-
tracts are intended to economically hedge foreign
currency risks to the extent possible, differences
between the contract terms of our derivatives and the
underlying forecasted exposures reduce our ability
to obtain hedge accounting in accordance with SFAS
No. 133. Accordingly, the changes in value for a major-
ity of these derivatives are recorded directly through
earnings.
During 2003, 2002, and 2001, we recorded aggre-
gate exchange losses of $11 and $77 and aggregate
gains of $29, respectively. This reflects the changes in
the values of all our foreign currency derivatives, for
which we did not apply hedge accounting, together
with exchange gains and losses on foreign currency
underlying assets and liabilities.
At December 31, 2003, we had outstanding for-
ward exchange and purchased option contracts with
gross notional values of $4,232. The following is a
summary of the primary hedging positions and corre-
sponding fair values held as of December 31, 2003: