EMC 2003 Annual Report Download - page 33

the announcement of acquisitions, new products, services or technological innovations by us or our competitors
quarterly variations in our operating results
changes in revenue or earnings estimates by the investment community
speculation in the press or investment community
In addition, our stock price is affected by general economic and market conditions and has been negatively affected by unfavorable global economic and
market conditions. If such conditions deteriorate, our stock price could decline.
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ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk, primarily from changes in foreign exchange rates, interest rates and credit risk. To manage the volatility relating to these
exposures, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures.
Foreign Exchange Risk Management
As a multinational corporation, we are exposed to changes in foreign exchange rates. Any foreign currency transaction, defined as a transaction
denominated in a currency other than the U.S. dollar, will be reported in U.S. dollars at the applicable exchange rate. Asset and liabilities are translated into
U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the period. The primary
foreign currency denominated transactions include revenue and expenses and the resultant accounts receivable and accounts payable balances reflected on our
balance sheet. Therefore, the change in the value of the U.S. dollar as compared to foreign currencies will have either a positive or negative effect on our
financial position and results of operations. We enter into derivative contracts with the sole objective of decreasing the volatility of the impact of currency
fluctuations. These exposures may change over time and could have a material adverse impact on our financial results. Historically, our primary exposure has
related to sales denominated in the Euro, the Brazil real, the Japanese yen and the British pound. Additionally, we have exposure to emerging market
economies, particularly in Latin America and South East Asia. Despite the relatively small size of our exposure in these markets, the inherent volatility of
these economies could negatively impact our financial results.
We use foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. In all cases, we use these derivative instruments
to reduce our foreign exchange risk by essentially creating offsetting market exposures. The success of the hedging program depends on our forecasts of
transaction activity in the various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could
experience unanticipated currency gains or losses. The instruments we hold are not leveraged and are not held for trading or speculative purposes.
We employ a variance/covariance model to calculate value-at-risk for our combined foreign exchange position. This model assumes that the relationships
among market rates and prices that have been observed over the last year are valid for estimating risk over the next trading day. Estimates of volatility and
correlations of market factors are drawn from the RiskMetrics dataset as of December 31, 2003. This model measures the potential loss in fair value that could
arise from changes in market conditions, using a 95% confidence level and assuming a one-day holding period. The value-at-risk on the combined foreign
exchange position was $0.5 million as of December 31, 2003 and $0.3 million as of December 31, 2002. The average, high and low value-at-risk amounts for
2003 and 2002 were as follows (in millions):
Average High Low
2003 $ 0.6 $1.3 $0.3
2002 0.4 0.6 0.3
The average value represents an average of the quarter-end values. The high and low valuations represent the highest and lowest values of the quarterly
amounts.
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Interest Rate Risk
We maintain an investment portfolio consisting of debt securities of various types and maturities. The investments are classified as available for sale and
are all denominated in U.S. dollars. These securities are recorded on the balance sheet at market value, with any unrealized gain or loss recorded in other
comprehensive income (loss). These instruments are not leveraged and are not held for trading purposes. A portion of our investment portfolio is comprised of
mortgage-backed securities that are subject to prepayment risk.
We employ a variance/covariance model to calculate value-at-risk for changes in interest rates for our combined investment portfolios. This model
assumes that the relationships among market rates and prices that have been observed over the last year are valid for estimating risk over the next trading day.
Estimates of volatility and correlations of market factors are drawn from the RiskMetrics dataset as of December 31, 2003. This model measures the potential
loss in fair value that could arise from changes in interest rates, using a 95% confidence level and assuming a one-day holding period. The value-at-risk on the
investment portfolios was $6.0 million as of December 31, 2003 and $5.5 million as of December 31, 2002. The average, high and low value-at-risk amounts
for 2003 and 2002 were as follows (in millions):
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