Activision 2008 Annual Report Download - page 42

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28
adoption is prohibited. The adoption of FSP FAS 142-3 did not have a material impact on our
Consolidated Financial Statements.
Inflation
Our management currently believes that inflation has not had a material impact on
continuing operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from fluctuations in market rates and prices. Our
market risk exposures primarily include fluctuations in interest rates, currency exchange rates, and
market prices. Our views on market risk are not necessarily indicative of actual results that may
occur and do not represent the maximum possible gains and losses that may occur, since actual
gains and losses will differ from those estimated, based upon actual fluctuations in interest rates,
currency exchange rates, market prices, and the timing of transactions.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our
investment portfolio. We do not use derivative financial instruments to manage interest rate risk in
our investment portfolio. Our investment portfolio consists primarily of debt instruments with high
credit quality and relatively short average maturities and money market funds that invest in such
securities. Because short-term securities mature relatively quickly and must be reinvested at the
then current market rates, interest income on a portfolio consisting of cash, cash equivalents, or
short-term securities is more subject to market fluctuations than a portfolio of longer term
securities. Conversely, the fair value of such a portfolio is less sensitive to market fluctuations
than a portfolio of longer term securities. At December 31, 2008, our cash and cash equivalents,
and short-term investments included money market funds and mortgage-backed securities of
$2,609 million and $7 million, respectively. We have $78 million in auction rate securities at fair
value, which are classified as long-term investments, at December 31, 2008. Most of our
investment portfolio is invested in short-term or variable rate securities. Accordingly, we believe
that a sharp change in interest rates would not have a material effect on our short-term investment
portfolio.
Currency Exchange Rate Risk
We transact business in many different foreign currencies and may be exposed to
financial market risk resulting from fluctuations in foreign currency exchange rates. Currency
volatility is monitored frequently throughout the year. To mitigate our risk from foreign currency
fluctuations we enter into currency forward contracts with Vivendi, generally with maturities of
twelve months or less. . We expect to continue to use economic hedge programs in the future and
may use, in addition to currency forward contracts, derivative financial instruments such as
currency options to reduce financial market risks if it is determined that such hedging activities are
appropriate to reduce risk. We do not hold or purchase any foreign currency contracts for trading
or speculative purposes. The following procedures are designed to prohibit speculative
transactions:
• Vivendi is the counterparty for foreign currency transactions within Activision
Blizzard, unless specific regulatory, operational, or other considerations require
otherwise; and