EMC 2007 Annual Report Download - page 45

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. 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 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, 2007. 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 $2.4 million as of December 31, 2007 and $1.9 million as of December 31, 2006. The average, high and
low value-at-risk amounts for 2007 and 2006 were as follows (in millions):
Average High Low
2007 $ 0.7 $2.4 $(0.5)
2006 $ 1.9 $2.3 $ 1.5
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 cash and cash equivalents, 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 cash and cash equivalents and short and long-term investments primarily in investment grade instruments and limit the
amount of investment with any one issuer. 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, 2007, 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.
The credit risk associated with accounts and notes receivables is low due to the large number of customers and their broad dispersion over many different
industries and geographic areas. We establish an allowance for the estimated uncollectible portion of our accounts and notes receivable. The allowance was
$35.9 million and $41.5 million at December 31, 2007 and 2006, respectively. We customarily sell the notes receivable we derive from our leasing activity.
Generally, we do not retain any recourse on the sale of these notes.
40