Citrix 2006 Annual Report Download - page 52

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The following discussion about our market risk includes
“forward-looking statements” that involve risks and
uncertainties. Actual results could differ materially from
those projected in the forward-looking statements. The
analysis methods we used to assess and mitigate risk
discussed below should not be considered projections of
future events, gains or losses.
We are exposed to financial market risks, including
changes in foreign currency exchange rates and interest
rates that could adversely affect our results of operations
or financial condition. To mitigate foreign currency risk, we
utilize derivative financial instruments. The counterparties
to our derivative instruments are major financial institutions.
All of the potential changes noted below are based on
sensitivity analyses performed on our financial position as
of December 31, 2006. Actual results could differ materially.
Discussions of our accounting policies for derivatives and
hedging activities are included in Notes 3 and 14 to our
consolidated financial statements included elsewhere in
this Annual Report.
Exposure to Exchange Rates
A substantial majority of our overseas expense and capital
purchasing activities are transacted in local currencies,
including euros, British pounds sterling, Australian
dollars, Swiss francs, Japanese yen, Hong Kong dollars,
Canadian dollars, Danish krone and Swedish krona. To
reduce exposure to reduction in U.S. dollar value and
the volatility of future cash flows caused by changes in
currency exchange rates, we have established a hedging
program. We use foreign currency forward contracts to
hedge certain forecasted foreign currency expenditures.
Our hedging program significantly reduces, but does not
entirely eliminate, the impact of currency exchange
rate movements.
At December 31, 2006 and 2005, we had in place foreign
currency forward sale contracts with a notional amount of
$56.0 million and $81.7 million, respectively, and foreign
currency forward purchase contracts with a notional
amount of $220.0 million and $191.5 million, respectively.
At December 31, 2006, these contracts had an aggregate
fair asset value of $4.6 million and at December 31, 2005,
these contracts had an aggregate fair liability value of
$5.1 million. Based on a hypothetical 10% appreciation
of the U.S. dollar from December 31, 2006 market rates,
the fair value of our foreign currency forward contracts
would decrease the asset by $16.9 million, resulting in
a net liability position. Conversely, a hypothetical 10%
depreciation of the U.S. dollar from December 31, 2006
market rates would increase the fair value of our foreign
currency forward contracts by $16.9 million. In these
hypothetical movements, foreign operating costs would
move in the opposite direction. This calculation assumes
that each exchange rate would change in the same
direction relative to the U.S. dollar. In addition to the
direct effects of changes in exchange rates quantified
above, changes in exchange rates could also change
the dollar value of sales and affect the volume of sales as
competitors’ products become more or less attractive.
We do not anticipate any material adverse impact to our
consolidated financial position, results of operations,
or cash flows as a result of these foreign exchange
forward contracts.
Exposure to Interest Rates
We have interest rate exposures resulting from our
interest-based available-for-sale securities. We maintain
available-for-sale investments in debt securities and we
limit the amount of credit exposure to any one issuer
or type of instrument. The securities in our investment
portfolio are not leveraged. The securities classified as
available-for-sale are subject to interest rate risk. The
modeling technique used measures the change in fair
values arising from an immediate hypothetical shift in
market interest rates and assumes that ending fair values
include principal plus accrued interest and reinvestment
income. If market interest rates were to increase by 100
basis points from December 31, 2006 and 2005 levels,
the fair value of the available-for-sale portfolio would
decline by approximately $1.8 million and $0.2 million,
respectively. These amounts are determined by considering
the impact of the hypothetical interest rate movements on
our available-for-sale investment portfolios. This analysis
does not consider the effect of credit risk as a result of the
reduced level of overall economic activity that could exist
in such an environment. During the third quarter of 2005,
we terminated all of our interest rate swap agreements