eBay 2010 Annual Report Download - page 81

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and other income (expense), net included in our consolidated statement of income. During the year ended
December 31, 2010, we recognized losses related to these foreign exchange contracts of approximately $2.2 million.
As of December 31, 2010, we had outstanding foreign exchange contracts with notional values equivalent to
approximately $270.2 million with maturity dates within 95 days. At December 31, 2010, the fair value of these
contracts resulted in a net asset position of approximately $0.5 million.
Economic Exposure
We transact business in various foreign currencies and have significant international revenues as well as
costs denominated in foreign currencies, subjecting us to foreign currency risk. In addition, we charge our
international subsidiaries on a monthly basis for their use of intellectual property and technology and for certain
corporate services provided by eBay and by PayPal. These charges are generally denominated in Euros and these
forecasted inter-company transactions represent a foreign currency cash flow exposure. We purchase foreign
exchange contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows related
primarily to forecasted revenue and intercompany transactions denominated in certain foreign currencies. The
objective of the foreign exchange contracts is to better ensure that the U.S. dollar-equivalent cash flows are not
adversely affected by changes in the U.S. dollar/foreign currency exchange rate. These foreign currency contracts
that we designate as cash flow hedges are expected to be highly effective in offsetting potential changes in cash
flows attributed to a change in the U.S. dollar/foreign currency exchange rate. Accordingly, the effective portion
of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income
(loss) and subsequently reclassified into the financial statements line item in which the hedged item is recorded
in the same period the forecasted transaction affects earnings.
During the year ended December 31, 2010, we realized net gains on these cash flow hedge contracts of
approximately $11.1 million which were reported as part of PayPal’s net revenues. The notional amount of our
economic hedges was $1.5 billion as of December 31, 2010 of which $1.2 billion was designated for cash flow
hedge accounting treatment. At December 31, 2010, the fair value of these economic hedge contracts resulted in
a net asset position of approximately $31.7 million.
Translation Exposure
As our international operations grow, fluctuations in foreign currencies create volatility in our reported
results of operations because we are required to consolidate the results of operations of our non-U.S. dollar
denominated subsidiaries. We may decide to purchase foreign exchange contracts or other instruments to
economically offset the earnings impact of currency fluctuations. Such non-designated foreign exchange
contracts will be marked-to-market on a monthly basis and any unrealized gain or loss will be recorded in interest
and other income (expense), net. During the year ended December 31, 2010, we recognized net losses related to
these non-designated foreign exchange contracts of approximately $7.1 million.
Foreign exchange rate fluctuations may adversely impact our financial position as the assets and liabilities
of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheet. The
cumulative effect of foreign exchange rate fluctuations on our consolidated financial position at the end of
December 31, 2010, was a net translation gain of approximately $394.8 million. This gain is recognized as an
adjustment to stockholders’ equity through accumulated other comprehensive income.
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of
cash equivalents and short-term and long-term investments in a variety of securities, including government and
corporate securities and money market funds. These securities are generally classified as available for sale and
consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate
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