3Ware 2005 Annual Report Download - page 54

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign
currency exchange rates, interest rates and a decline in the stock market. We are exposed to market risks related
to changes in interest rates and foreign currency exchange rates.
We maintain an investment portfolio of various holdings, types and maturities. These securities are
classified as available-for-sale and, consequently, are recorded on the consolidated balance sheets at fair value
with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (or
loss). We have established guidelines relative to diversification and maturities that attempt to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take advantage of interest rate trends. We
invest our excess cash in debt instruments of the U.S. Treasury, corporate bonds, mortgage-backed and asset
backed securities and closed-end bond funds, with credit ratings as specified in our investment policy. We also
have invested in preferred stocks, which pay quarterly fixed rate dividends. We generally do not utilize
derivatives to hedge against increases in interest rates which decrease market values, except for one investment
manager who utilizes U.S. Treasury bond futures options (“futures options”) as a protection against the impact of
increases in interest rates on the fair value of preferred stocks managed by that investment manager.
We are exposed to market risk as it relates to changes in the market value of our investments. At March 31,
2005, our investment portfolio included fixed-income securities classified as available-for-sale investments with
a fair market value of $348.0 million and a cost basis of $355.5 million. These securities are subject to interest
rate risk, as well as credit risk, and will decline in value if interest rates increase or an issuer’s credit rating or
financial condition is decreased. The following table presents the hypothetical changes in fair value of our short-
term investments held at March 31, 2005 (in thousands):
Valuation of Securities Given an
Interest Rate Decrease of
X Basis Points
Fair
Value as
of
March 31,
2005
Valuation of Securities Given an
Interest Rate Increase of
X Basis Points
(150 BPS) (100 BPS) (50 BPS) (50 BPS) (100 BPS) (150 BPS)
Available-for-sale
investments ........... $378,137 $367,566 $357,462 $347,996 $339,572 $331,710 $324,283
The modeling technique used measures the change in fair market value arising from selected potential
changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus
or minus 50 basis points, 100 basis points, and 150 basis points.
We invest in equity instruments of private companies for business and strategic purposes. These investments
are valued based on our historical cost, less any recognized impairments. The estimated fair values are not
necessarily representative of the amounts that we could realize in a current transaction.
We generally conduct business, including sales to foreign customers, in U.S. dollars, and as a result, we
have limited foreign currency exchange rate risk. However, we have entered into forward currency exchange
contracts to hedge our overseas monthly operating expenses when deemed appropriate. Gains and losses on
foreign currency forward contracts that are designated and effective as hedges of anticipated transactions, for
which a firm commitment has been attained, are deferred and included in the basis of the transaction in the same
period that the underlying transaction is settled. Gains and losses on any instruments not meeting the above
criteria are recognized in income or expenses in the consolidated statement of operations in the current period.
The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on our
financial condition or results of operations.
48