Cisco 2014 Annual Report Download - page 77

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Foreign Currency Exchange Risk
Our foreign exchange forward and option contracts outstanding at fiscal year-end are summarized in U.S. dollar equivalents as
follows (in millions):
July 26, 2014 July 27, 2013
Notional
Amount Fair Value
Notional
Amount Fair Value
Forward contracts:
Purchased ........................................... $2,635 $(3) $3,472 $ 7
Sold ................................................ $ 896 $ 2 $1,401 $ (5)
Option contracts:
Purchased ........................................... $ 494 $ 5 $ 716 $23
Sold ................................................ $ 466 $(2) $ 696 $ (4)
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on revenue has not
been material because our sales are primarily denominated in U.S. dollars. However, if the U.S. dollar strengthens relative to
other currencies, such strengthening could have an indirect effect on our revenue to the extent it raises the cost of our products
to non-U.S. customers and thereby reduces demand. A weaker U.S. dollar could have the opposite effect. However, the precise
indirect effect of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in
addition to the impact of such currency fluctuations.
Approximately 65% of our operating expenses are U.S.-dollar denominated. In fiscal 2014, foreign currency fluctuations, net
of hedging, decreased our combined R&D, sales and marketing, and G&A expenses by $153 million, or approximately 0.9%,
compared with fiscal 2013.In fiscal 2013, foreign currency fluctuations, net of hedging, decreased our combined R&D, sales
and marketing, and G&A expenses by $227 million, or approximately 1.3% as compared with fiscal 2012. To reduce
variability in operating expenses and service cost of sales caused by non-U.S.-dollar denominated operating expenses and
costs, we hedge certain forecasted foreign currency transactions with currency options and forward contracts. These hedging
programs are not designed to provide foreign currency protection over long time horizons. In designing a specific hedging
approach, we consider several factors, including offsetting exposures, significance of exposures, costs associated with entering
into a particular hedge instrument, and potential effectiveness of the hedge. The gains and losses on foreign exchange contracts
mitigate the effect of currency movements on our operating expenses and service cost of sales.
We also enter into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency
fluctuations on receivables and payables that are denominated in currencies other than the functional currencies of the entities.
The market risks associated with these foreign currency receivables, investments, and payables relate primarily to variances
from our forecasted foreign currency transactions and balances. Our forward and option contracts generally have the following
maturities:
Maturities
Forward and option contracts—forecasted transactions related to operating expenses and service cost of sales . . Up to 18 months
Forward contracts—current assets and liabilities ............................................... Upto3months
Forward contracts—net investments in foreign subsidiaries ....................................... Upto6months
Forward contracts—long-term customer financings ............................................. Upto2years
We do not enter into foreign exchange forward or option contracts for trading purposes.
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