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Table of Contents
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 Measurisk dataset as of December 31, 2008. 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 $9.4 million as of December 31, 2008 and $2.4 million as of December 31, 2007. The average, high and low value-at-
risk amounts for 2008 and 2007 were as follows (in millions):
Average High Low
2008 $ 6.5 $9.4 $ 4.1
2007 $ 0.7 $2.4 $(0.5)
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 that potentially subject us to concentration of credit risk consist principally of bank deposits, money market investments, short and
long-term investments, accounts and notes receivable, and foreign currency exchange contracts. Deposits held with banks in the United States may exceed the
amount of FDIC insurance provided on such deposits. Deposits held with banks outside the United States generally do not benefit from FDIC insurance. The
majority of our day-to-day banking operations globally are maintained with Citibank. We believe that Citibank's position as a primary clearing bank, coupled
with the substantial monitoring of their daily liquidity, both by their internal processes and by the Federal Reserve and the FDIC, mitigate some of our risk.
Our money market investments are placed with money market funds that are 2A7 qualified. We limit our investments in money market funds to those
that are primarily associated with large, money center financial institutions. While some money market funds were forced to break a one dollar net asset value
as a result of the financial crisis in the fourth quarter of 2008, none of the money market funds in which we were invested were affected. In the fourth quarter
of 2008, the FDIC provided guarantees to investors in money market funds for balances held as of September 19, 2008. While most of our United States-
domiciled money market investments benefit from this guarantee, our offshore money market investments do not benefit from this guarantee.
Our short and long-term investments are invested primarily in investment grade securities, and we limit the amount of our investment in any single
issuer. Some of our investments have been downgraded from investment grade as a result of the global financial crisis. We routinely monitor these
investments and make assessments of our credit exposure as a result of these downgrades.
We participate in securities lending agreements with financial institutions to enhance investment income. Securities are loaned to independent brokers for
which we receive cash collateral equal to 102% of the fair market value of the securities. The loaned securities remain on our balance sheet as we maintain
ownership while the investments are on loan. Our securities lending agent has provided us with a 100% counterparty indemnification in the event of borrower
default. As of December 31, 2008, we had received $412.3 million in cash collateral which has been subsequently invested in short-term investments.
The credit risk associated with accounts and notes receivable 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
$50.6 million and $35.9 million at December 31, 2008 and 2007, 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.
The counterparties to our foreign currency exchange contracts consist of a number of major financial institutions. In addition to limiting the amount of
contracts we enter into with any one party, we monitor the credit quality of the counterparties on an ongoing basis.
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