EMC 2004 Annual Report Download - page 44

Download and view the complete annual report

Please find page 44 of the 2004 EMC annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

Table of Contents
A portion of our investment portfolio is comprised of mortgage-backed securities that are subject to prepayment risk.
We employ a Monte Carlo simulation 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 daily over the last two years are valid for estimating risk over the next
trading day. Estimates of volatility and correlations of market factors are drawn from the BearMeasurisk dataset as of December 31, 2004. 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 $6.5 million as of December 31, 2004 and $6.0 million as of December 31, 2003. The average, high and
low value-at-risk amounts for 2004 and 2003 were as follows (in millions):
Average High Low
2004 $ 7.5 $ 9.6 $ 5.8
2003 $ 6.7 $ 7.7 $ 6.0
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.
Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of temporary cash investments, short and long-term
investments, accounts and notes receivable and foreign currency exchange contracts. Deposits held with banks may exceed the amount of insurance provided
on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore
bear minimal credit risk. We place our temporary cash investments and short and long-term investments primarily in investment grade instruments and limit
the amount of investment with any one issuer. We purchased bank loans with credit ratings below investment grade. The bank loans have a senior position to
other debt and have floating-rate coupons, which significantly reduces interest rate risk. As of December 31, 2004, bank loans represent 7% of our cash and
cash equivalents and short and long-term investments. We believe this investment strategy more effectively manages our exposure to interest rate risk and
diversifies our investment portfolio. We have entered into various agreements to loan fixed income securities generally on an overnight basis. Under these
securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally cash,
U.S. government-backed securities or letters of credit. At December 31, 2004, there were no outstanding securities lending transactions. The counterparties to
our foreign currency exchange contracts consist of a number of major financial institutions. In addition to limiting the amount of the contracts we enter into
with any one party, we monitor the credit quality of the counterparties.
We employ a Monte Carlo simulation model to calculate value-at-risk for changes in credit conditions for our bank loan portfolios. This model assumes
that the relationships among credit spreads, market rates and prices that have been observed daily over the last two years are valid for estimating risk over the
next trading day. Estimates of volatility and correlations of market factors are drawn from the BearMeasurisk dataset as of December 31, 2004. 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 bank-loan portfolios was $1.0 million as of December 31, 2004 and $0.4 million as of December 31, 2003. The average, high
and low value-at-risk amount for 2004 and 2003 were as follows (in millions):
Average High Low
2004 $ 0.9 $ 1.3 $ 0.5
2003 $ 0.4 $ 0.4 $ 0.3
41