Adobe 1998 Annual Report Download - page 30

period. Corresponding gains and losses on the foreign currency denominated transactions being hedged
are recognized in income in that same period. In this manner, the gains and losses on foreign currency
denominated transactions will be offset by the gains and losses on the foreign currency contracts. The
Company does not anticipate any material adverse effect on its consolidated financial position, results of
operations, or cash flows as a result of these instruments. The Company uses yen options to hedge
anticipated exposures.
The Company does not use derivative financial instruments for speculative trading purposes, nor does
the Company hedge its foreign currency exposure in a manner that entirely offsets the effects of changes in
foreign exchange rates.
The Company currently does not use financial instruments to hedge local currency denominated
operating expenses in Europe. Instead, the Company believes that a natural hedge exists, in that local
currency revenue from product upgrades substantially offsets the local currency denominated operating
expenses. The Company assesses the need to utilize financial instruments to hedge European currency
exposure on an ongoing basis.
The Company regularly reviews its hedging program and may as part of this review determine at any
time to change its hedging program.
Fixed income investments
At November 27, 1998, the Company had an investment portfolio of fixed income securities, including
those classified as cash equivalents, and restricted funds and security deposits of $372.1 million. These
securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the
market value of the Company’s fixed income securities.
A sensitivity analysis was performed on the Company’s investment portfolio as of November 27, 1998.
This sensitivity analysis is based on a modeling technique that measures the hypothetical market value
changes that would result from a parallel shift in the yield curve of plus 50, plus 100, or plus 150 basis
points over six-month and twelve-month time horizons. The market value changes for a 50, 100, or 150
basis point increase in short-term treasury security yields were not material due to the limited duration of
the Company’s portfolio.
The Company does not use derivative financial instruments in its investment portfolio to manage
interest rate risk. The Company does, however, limit its exposure to interest rate and credit risk by
establishing and strictly monitoring clear policies and guidelines for its fixed income portfolios. At the
present time, the maximum duration of all portfolios is limited to 2.3 years. The guidelines also establish
credit quality standards, limits on exposure to one issue, issuer, as well as the type of instrument. Due to
the limited duration and credit risk criteria established in the Company’s guidelines, the exposure to
market and credit risk is not expected to be material.
Facility Leases
The Company is exposed to interest rate risk associated with leases of on its facilities whose
payments are tied to the London Interbank Offered Rate (‘‘LIBOR’’) and has evaluated the hypotheti-
cal changes in lease obligations arising from selected hypothetical changes in the LIBOR rate. Market
changes reflected immediate hypothetical parallel shifts in the LIBOR curve of plus or minus 50, 100,
and 150 basis points for a twelve-month period. Based on this analysis, such charges would not be
material to the Company’s results of operations or financial position.
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