Activision 2011 Annual Report Download - page 44

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, foreign currency exchange rates and market prices.
Foreign 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. Revenues and related expenses generated from our international operations are
generally denominated in their respective local currencies. Primary currencies include euros, British pounds, Australian dollars,
South Korean won and Swedish krona. Currency volatility is monitored throughout the year. To mitigate our foreign currency
exchange rate exposure resulting from our foreign currency denominated monetary assets, liabilities and earnings, we
periodically enter into currency derivative contracts, principally swaps and forward contracts with maturities of twelve months or
less. Vivendi is our principal counterparty and the risks of counterparty non-performance associated with these contracts are not
considered to be material. We expect to continue to use economic hedge programs in the future to reduce foreign
exchange-related volatility 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. All foreign currency economic hedging transactions
are backed, in amount and by maturity, by an identified economic underlying item. Our foreign exchange forward contracts are
not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts are reported as
other current assets or other current liabilities in our consolidated balance sheets, and the associated gains and losses from
changes in fair value are reported in investment and other income, net and general and administrative expense in the
consolidated statements of operations.
The gross notional amount of outstanding foreign exchange swaps was $85 million and $138 million at December 31,
2011 and 2010, respectively. A pre-tax net unrealized loss of $1 million and an unrealized gain of less than a million for the
years ended 2011 and 2010, respectively, resulted from the foreign exchange contracts and swaps with Vivendi and were
recognized in the consolidated statements of operations.
The consolidated statements of operations are translated into U.S. dollars at exchange rates indicative of market rates
during each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these
foreign currency-denominated transactions results in reduced revenues, operating expenses and net income from our
international operations. Similarly, our revenues, operating expenses and net income will increase for our international
operations if the U.S. dollar weakens against foreign currencies. We recognized a realized loss of $7 million for the year ended
December 31, 2011 from the settlement of the hedging foreign exchange contracts and there was no outstanding foreign
exchange contract hedging translation risk as of December 31, 2011. In the absence of the hedging activities described above, as
of December 31, 2011, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in
potential declines in our net income of approximately $90 million. This sensitivity analysis assumes a parallel adverse shift of all
foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in
such manner and actual results may differ materially.
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 highly rated government-backed 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, 2011, our $3.5 billion of cash and
cash equivalents were comprised primarily of money market funds. At December 31, 2011, our $360 million of short-term
investments included $344 million of U.S. treasury and government sponsored agency debt securities and $16 million of
restricted cash. We had $16 million in auction rate securities at fair value classified as long-term investments at December 31,
2011. The Company has determined that, based on the composition of our investment portfolio as of December 31, 2011, there
was no material interest rate risk exposure to the Company’s consolidated financial position, results of operations or cash flows
as of that date.
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