Adobe 2003 Annual Report Download - page 56

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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 50%, 35%, and 15% were selected based on the
probability of their occurrence.
50% 35% 15%
Marketable equity securities .......... $ (3.6) $ (2.5) $ (1.1)
Fixed Income Investments
At November 28, 2003, we had an investment portfolio of fixed income securities, including those classified as
cash equivalents, of $1,069.0 million compared to $581.7 million at November 29, 2002, an increase of 84%. This
increase was primarily due to strong operational cash flow, proceeds from stock option exercises and lower levels of
stock repurchases. These securities are subject to interest rate fluctuations. Changes in interest rates could adversely
affect the market value of our fixed income investments. The table below separates the remaining maturities of our
fixed income securities into segments to show the approximate exposure to interest rates.
Less than one year.......................... $ 517.8
One year to two years..................... 322.0
Greater than two years ................... 229.2
Total............................................... $ 1,069.0
A sensitivity analysis was performed on our investment portfolio as of November 28, 2003. 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, 100, or 150 basis points over six-month and twelve-month time
horizons. The following table represents the potential decrease to the value of our fixed income securities given a
negative shift in the yield curve used in our sensitivity analysis.
0.5% 1.0% 1.5%
6 month horizon ............................. $ (5.0) $ (9.9) $ (14.5)
12 month horizon ........................... $ (4.2) $ (8.4) $ (13.9)
We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and
guidelines for our fixed income portfolios. At the present time, the maximum duration of all portfolios is limited to
2.5 years. The guidelines also establish credit quality standards, limits on exposure to any one security issue, limits
on exposure to any one issuer and limits on exposure to the type of instrument. Due to limited duration and credit
risk criteria established in our guidelines we do not expect the exposure to interest rate risk and credit risk to be
material.
Interest Rate Hedging Instruments
We are exposed to interest rate risk on operating lease obligations that are tied to short-term interest rates
(LIBOR). While the exposure of our fixed income portfolio to similar short-term interest rates may naturally offset
some of the risk, in general as short-term interest rates rise, it may negatively impact our operating income. It is our
strategy to hedge a portion of that risk. Our policy permits us to hedge this interest rate risk using swap agreements.
The swap agreements exchange variable interest rate payments for fixed interest rate payments with high quality
counterparties. Our swaps are designated as cash flow hedges under SFAS No. 133 because they hedge against
changes in the amount of future cash flows. The critical terms of the cash flow hedging instruments are the same as
the underlying lease obligation, so the change in fair value of the swaps is recognized in accumulated other
comprehensive income. If, for some reason, the terms of the hedge no longer matched the underlying obligation, the
change in value of the ineffective portion would be recognized in other income (loss) on the consolidated statement
of income.