Adobe 2009 Annual Report Download - page 72

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Risk
Foreign Currency Hedging Instruments
In countries outside the U.S., we transact business, in U.S. dollars and in various other currencies. In Europe and Japan,
transactions that are denominated in Euro and Yen, respectively, are subject to exposure from movements in exchange rates.
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 exchange rates. We may use foreign exchange
option or forward contracts for Euro- or Yen-denominated revenue.
In fiscal 2009, 2008 and 2007, our revenue exposures were 504.3 million Euros, 628.2 million Euros and 595.5 million
Euros, respectively. In fiscal 2009, 2008 and 2007, our revenue exposures were 30.3 billion Yen, 36.8 billion Yen and 35.5
billion Yen, respectively.
Our European operating expenses are primarily in Euro and our Japanese operating expenses are in Yen, which
mitigates a portion of the exposure related to Euro and Yen denominated product revenue. In addition, we hedge firmly
committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and losses;
however, the gains and losses on these contracts largely offset gains and losses on the assets, liabilities and transactions being
hedged. We also hedge a percentage of forecasted international revenue with purchased option contracts and forward
contracts. Our revenue hedging policy is intended to help mitigate the impact on our forecasted revenue due to foreign
currency exchange rate movements. As of November 27, 2009, total outstanding contracts were $510.4 million which
included the notional equivalent of $283.9 million in Euro, 182.1 million in Yen and $44.4 million in other foreign
currencies. These hedges are foreign currency forward exchange contracts which hedged our balance sheet exposures and
purchased put option contracts which hedged our forecasted revenue. As of November 27, 2009, all contracts were set to
expire at various times through July 2010. The bank counterparties in these contracts expose us to credit-related losses in the
event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum
requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for
each counterparty.
In addition, we also have long-term investment exposures consisting of the capitalization and retained earnings in our
non-USD functional currency foreign subsidiaries. As of November 27, 2009 and November 28, 2008, this long-term
investment exposure totaled a notional equivalent of $228.8 million and $149.1 million, respectively. At this time, we do not
hedge these long-term investment exposures.
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 Euro and the Japanese Yen. 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, 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 to
interest and other income, net on our Consolidated Statements of Income at that time. For the fiscal year ended November 27,
2009, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did
not occur.
See Note 5 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