Adobe 1999 Annual Report Download - page 36

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We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our
foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.
We currently do not use financial instruments to hedge local currency denominated operating
expenses in Europe. Instead, we believe that a natural hedge exists, in that local currency revenue from
product upgrades substantially offsets the local currency denominated operating expenses. We assess the
need to utilize financial instruments to hedge European currency exposure on an ongoing basis.
We regularly review our hedging program and may as part of this review determine at any time to
change our hedging program.
Fixed income investments
At December 3, 1999, we had an investment portfolio of fixed income securities, including those
classified as cash equivalents, of $327.0 million. These securities are subject to interest rate fluctuations.
An increase in interest rates could adversely affect the market value of our fixed income securities.
A sensitivity analysis was performed on our investment portfolio as of November 30, 1999. This
sensitivity analysis was 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
our portfolio.
We do not use derivative financial instruments in our investment portfolio to manage interest rate
risk. We do, however, limit our 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 our guidelines, we do not expect the exposure to market and credit risk to be
material.
Facility leases
We are exposed to interest rate risk associated with leases of our facilities whose payments are tied to
the LIBOR and have evaluated the hypothetical 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 our results of operations or financial position.
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