Adobe 2008 Annual Report Download - page 65

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Economic Hedging—Hedges of Forecasted Transactions
We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”)
exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value,
may have maturities between one and twelve months. Such cash flow exposures result from portions of our forecasted
revenue denominated in currencies other than the U.S. dollar, primarily the Japanese Yen and the Euro. We enter into these
foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business and accordingly,
they are not speculative in nature.
We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss),
until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the
cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it
will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income
(loss) to interest and other income (loss) on the consolidated statement of income at that time. For the fiscal year ended
November 28, 2008, there were no such net gains or losses recognized in other income relating to hedges of forecasted
transactions that did not occur.
See Note 17 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward 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, 2008, 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, 2008. This
sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10%
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% 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 $47.3 million. Conversely,
a 10% decrease in the value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by
$38.7 million.
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 to change our hedging program.
See Note 17 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Privately-Held Long-Term Investments
The privately-held companies in which we invest, can still be considered in the start-up or development stages which are
inherently risky. The technologies or products these companies have under development are typically in the early stages and
may never materialize, which could result in a loss of a substantial part of our initial investment in these companies. The
evaluation of privately-held companies is based on information that we request from these companies which is not subject to