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revenue denominated in currencies other than the U.S. dollar, primarily the Euro, Yen, and British Pound. 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 December 3,
2010, 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
changes in the fair value recorded as interest and other income, net. 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 December 3, 2010, 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 December 3, 2010. 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 $56.2 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 $39.5 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 5 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Interest Rate Risk
Short-Term Investments and Fixed Income Securities
At December 3, 2010, we had debt securities classified as short-term investments of $1,706.9 million. Changes in
interest rates could adversely affect the market value of these investments. The following table separates these investments,
based on stated maturities, to show the approximate exposure to interest rates (in millions):
Due within one year .....................................................................................................................................
$
625.4
Due within two years ...................................................................................................................................
523.2
Due within three years .................................................................................................................................
446.3
Due after three years ....................................................................................................................................
112.0
Total .........................................................................................................................................................
$
1,706.9
A sensitivity analysis was performed on our investment portfolio as of December 3, 2010. The analysis is based on an
estimate of the hypothetical changes in market value of the portfolio that would result from an immediate parallel shift in the
yield curve of various magnitudes.