eBay 2002 Annual Report Download - page 77

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time
maximizing yields without signiÑcantly increasing risk. To achieve this objective, we maintain our portfolio
of cash equivalents, short-term and long-term investments in a variety of securities, including government
and corporate obligations and money market funds. These securities are generally classiÑed as available for
sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income (loss), net of estimated
tax.
Investments in both Ñxed rate and Öoating rate interest earning instruments carry varying degrees of
interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in
interest rates. In general, securities with longer maturities are subject to greater interest rate risk than
those with shorter maturities. While Öoating rate securities generally are subject to less interest rate risk
than Ñxed rate securities, Öoating rate securities may produce less income than expected if interest rates
decrease. Due in part to these factors, our investment income may fall short of expectations or we may
suÅer losses in principal if securities are sold that have declined in market value due to changes in interest
rates. As of December 31, 2002, our Ñxed income investments had an unrealized gain of $3.6 million with
a pretax yield of approximately 2.2% and a weighted average maturity of 2 months. If interest rates were
to instantaneously increase (decrease) by 100 basis points, the fair market value of the total investment
portfolio could decrease (increase) by approximately $3.3 million. Assuming an average investment
balance of $1.8 billion, if rates were to increase (decrease) by 100 basis points, this would translate to an
increase (decrease) in interest income of approximately $18 million annually.
We entered into two interest rate swaps on June 19 and July 20, 2000, totaling $95 million to reduce
the impact of changes in interest rates on a portion of the Öoating rate operating lease for our primary
oÇce facilities. The interest rate swaps allow us to receive Öoating rate receipts based on LIBOR in
exchange for making Ñxed rate payments which eÅectively changes our interest rate exposure on our
operating lease from a Öoating rate to a Ñxed rate on $95 million of the total $126.4 million notional
amount of our operating lease commitment. Of the $126.4 million operating lease commitment for our San
Jose facility, the interest rate is Ñxed on $95 million with the balance of $31.4 million remaining at a
Öoating rate of interest based on the spread over 3-month LIBOR. See ""Item 2: Properties'' and ""Item 7:
Management's Discussion and Analysis of Financial Condition and Results of Operations.'' If the 3-month
LIBOR rates were to increase (decrease) by 100 basis points, then our lease payments would increase
(decrease) by approximately $78,000 per quarter.
Equity Price Risk
We are exposed to equity price risk on the marketable portion of equity investments we hold, typically
as the result of strategic investments in third parties that are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or eliminate our market exposure in these equity
investments. As of December 31, 2002, we did not have any unrealized gains or losses associated with our
equity investments. In accordance with our policy to assess whether an impairment loss on our investments
has occurred due to declines in fair value and other market conditions, we determined that declines in fair
value of certain of our marketable and non-marketable equity investments were other than temporary.
Accordingly, we recorded impairment charges totaling $3.8 million during the year ended December 31,
2002, relating to the other-than-temporary impairment in the fair value of certain equity investments. At
December 31, 2002, the total value of our equity investments was $44.2 million, including $3.4 million in
marketable investments.
Foreign Currency Risk
International net revenues result from transactions by our foreign operations and are typically
denominated in the local currency of each country. These operations also incur most of their expenses in
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