Adobe 2003 Annual Report Download - page 55

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See also Note 15 in our Notes to Consolidated Financial Statements.
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 are intended to offset gains and losses on the assets and liabilities being hedged. At November 28, 2003,
the outstanding balance sheet hedging derivatives had maturities of 90 days or less.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 28, 2003. 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. For option contracts, the Black-Scholes
equation model was used. For forward contracts, duration modeling was used where hypothetical changes are made
to the spot rates of the currency. 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 $21.3 million and $34.0 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
$16.3 million and $24.7 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 revenue from 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.
See also Note 15 in our Notes to Consolidated Financial Statements.
Equity Investments
We are exposed to equity price risk on our portfolio of marketable equity securities. As of November 28, 2003,
our total equity holdings in publicly traded companies were valued at $7.2 million compared to $14.1 million at
November 29, 2002, a decrease of 49%. The decrease was due to sales of $4.0 million and write-downs of $4.0
million, which were partially offset by a $1.1 million increase in market value adjustment. We believe that it is
reasonably possible that the fair values of these securities could adversely change 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 company’s 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 in value 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
write-down in our consolidated statements of income.