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Black
MAC
390 CG10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
85
SUBSIDIARY CASH AND FOREIGN CURRENCY
ASSET/LIABILITY MANAGEMENT
The company uses its Global Treasury Centers to manage the cash
of its subsidiaries. These centers principally use currency swaps to
convert cash flows in a cost-effective manner. In addition, the com-
pany uses foreign exchange forward contracts to economically hedge,
on a net basis, the foreign currency exposure of a portion of the
company’s nonfunctional currency assets and liabilities. The terms of
these forward and swap contracts are generally less than one year. The
changes in the fair values of these contracts and of the underlying
hedged exposures are generally offsetting and are recorded in Other
(income) and expense in the Consolidated Statement of Earnings.
EQUITY RISK MANAGEMENT
The company is exposed to equity price changes related to certain
obligations to employees. These equity exposures are primarily
related to market price movements in certain broad equity market
indices and in the company’s common stock. Changes in the overall
value of these employee compensation obligations are recorded in
SG&A expense in the Consolidated Statement of Earnings. Although
not designated as accounting hedges, the company utilizes equity
derivatives, including equity swaps and futures, to economically hedge
the exposures related to its employee compensation obligations. The
derivatives are linked to the total return on certain broad equity market
indices or the total return on the company’s common stock. They are
recorded at fair value with gains or losses reported in SG&A expense
in the Consolidated Statement of Earnings.
OTHER DERIVATIVES
The company holds warrants in connection with certain invest-
ments that are deemed derivatives because they contain net share
or net cash settlement provisions. The company records the changes
in the fair value of these warrants in Other (income) and expense in
the Consolidated Statement of Earnings.
The company is exposed to a potential loss if a client fails to pay
amounts due under contractual terms (“credit risk”). In 2003, the
company began utilizing credit default swaps to economically hedge
certain credit exposures. These derivatives have terms of two years
or less. The swaps are recorded at fair value with gains and losses
reported in Other (income) and expense in the Consolidated State-
ment of Earnings.
To economically hedge its foreign exchange exposure not covered
by any of the above programs, the company also uses certain forward
and option contracts that are not designated in accounting hedging
relationships. These derivatives are recorded at fair value with gains
and losses reported in Other (income) and expense in the Consolidated
Statement of Earnings.
The following tables summarize the net fair value of the compa-
ny’s derivative and other risk management instruments at December
31, 2006 and 2005 (included in the Consolidated Statement of
Financial Position).
RISK MANAGEMENT PROGRAM
(Dollars in millions)
HEDGE DESIGNATION
NET NON-HEDGE/
AT DECEMBER 31, 2006 FAIR VALUE CASH FLOW INVESTMENT OTHER
Derivatives—net asset/(liability):
Debt risk management $() $ $ — $()
Long-term investments in foreign subsidiaries (“net investments”) — — () —
Anticipated royalties and cost transactions — () — —
Anticipated commodity purchase transactions — () — —
Subsidiary cash and foreign currency asset/liability management — — — ()
Equity risk management — — — 
Other derivatives — — — 
Total derivatives ()(a) (b) ()(c) ()(d)
Debt:
Long-term investments in foreign subsidiaries (“net investments”) — — (,)(e) —
Total $() $  $(,) $()
(a)
Comprises assets of $1 million and liabilities of $140 million.
(b)
Comprises assets of $293 million and liabilities of $269 million.
(c) Comprises assets of $42 million and liabilities of $207 million.
(d) Comprises assets of $74 million and liabilities of $134 million.
(e) Represents foreign currency denominated debt formally designated as a hedge of net investment.