Adobe 2001 Annual Report Download - page 46

in other income on the consolidated statement of income. The time value of purchased derivative
instruments is deemed to be ineffective and is recorded in other income over the life of the contract.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange
contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in
foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are
denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as
other income (loss). These derivative instruments do not subject us to material balance sheet risk due to
exchange rate movements because gains and losses on these derivatives offset gains and losses on the assets
and liabilities being hedged. At November 30, 2001, the outstanding balance sheet hedging derivatives had
maturities of 60 days or less.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 30,
2001. This sensitivity analysis was based on a modeling technique that measures the hypothetical market
value resulting from a 10% and 15% shift in the value of exchange rates relative to the U.S. dollar. A 10%
and 15% increase in the value of the U.S. dollar (and a corresponding decrease in the value of the hedged
foreign currency asset) would lead to an increase in the fair value of our financial hedging instruments by
$16.0 million and $23.9 million, respectively. Conversely, a 10% and 15% decrease in the value of the U.S.
dollar would result in a decrease in the fair value of these financial instruments by $12.5 million and
$18.1 million, respectively.
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.
As a general rule, we do not use financial instruments to hedge local currency denominated operating
expenses in countries where a natural hedge exists. For example, in many countries the local currency
product licenses substantially offsets the local currency denominated operating expenses. We assess the
need to utilize financial instruments to hedge currency exposures, primarily related to operating expenses,
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.
Equity Investments
We are exposed to equity price risk on our portfolio of marketable equity securities. As of
November 30, 2001, our total equity holdings in publicly traded companies were valued at $37.8 million
compared to $90.2 million at December 1, 2000, a decrease of 58%. We believe that it is reasonably
possible that the fair values of these securities could experience further adverse changes in the near term.
We have a policy in place to review our equity holdings on a regular basis to evaluate whether or not each
security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not
limited to, reviewing each of the companies’ cash position, earnings/revenue outlook, stock price
performance over the past six months, liquidity and management/ownership. If we believe that an
other-than-temporary decline exists in one of our marketable equity securities, it is our policy to write
down these equity investments to the market value and record the related writedown in our consolidated
statements of income.
The following table represents the potential decrease in fair values of our marketable equity securities
that are sensitive to changes in the stock market. Fair value deteriorations of minus 50%, 35%, and 15%
were selected based on the probability of their occurrence.
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