EMC 2010 Annual Report Download - page 40

Table of Contents
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
foreign exchange risk, 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. Assets 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 are 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 Japanese yen and the pound sterling. Additionally, we have exposure to emerging market economies, particularly
in Latin America and Southeast Asia. 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 have performed sensitivity analyses as of December 31, 2010, 2009 and 2008 based on scenarios in which market spot rates are hypothetically
changed in order to produce a potential net exposure loss. The hypothetical change is based on a 10 percent strengthening or weakening in the U.S. dollar,
whereby all other variables are held constant. The analyses include all of our foreign currency contracts outstanding as of December 31 for each year, as well
as the offsetting underlying exposures. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would
result in a foreign exchange loss of $3.6, $1.2 and $2.2 at December 31, 2010, 2009 and 2008, respectively.
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 temporary non-credit
related loss recorded in other comprehensive loss. These instruments are not leveraged and are not held for trading purposes.
We employ a Historical Value-At-Risk calculation 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 180 days are valid for estimating risk over the
next trading day. 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 $4.4 as of December 31, 2010 and $3.9 as of December 31, 2009. The
average, high and low value-at-risk amounts for 2010 and 2009 were as follows:
Average High Low
2010 $ 4.4 $ 6.7 $ 3.0
2009 $ 4.5 $ 5.2 $ 3.9
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
39