Medtronic 2014 Annual Report Download - page 70

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Due to the global nature of our operations, we are exposed to currency exchange rate changes. In a period where the U.S. dollar
is strengthening/weakening as compared to other currencies, our revenues and expenses denominated in foreign currencies are
translated into U.S. dollars at a lower/higher value than they would be in an otherwise constant currency exchange rate
environment.
We use operational and economic hedges, as well as currency exchange rate derivative instruments, to manage the impact of
currency exchange rate fluctuations on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting
from currency exchange rate fluctuations, we enter into derivative instruments, principally forward currency exchange rate
contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific
assets and liabilities. At inception of the contract, the derivative instrument is designated as either a freestanding derivative or a
cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. Fluctuations in the
currency exchange rates of currency exposures that are unhedged, such as in certain emerging markets, may result in future
earnings and cash flow volatility. We do not enter into currency exchange rate derivative instruments for speculative purposes.
The gross notional amount of all currency exchange rate derivative instruments outstanding at April 25, 2014 and April 26,
2013 was $8.051 billion and $6.812 billion, respectively. At April 25, 2014, these contracts were in an unrealized loss position
of $27 million. A sensitivity analysis of changes in the fair value of all foreign currency exchange rate derivative contracts at
April 25, 2014 indicates that, if the U.S. dollar uniformly strengthened/weakened by 10 percent against all currencies, the fair
value of these contracts would increase/decrease by approximately $617 million. Any gains and losses on the fair value of
derivative contracts would generally be offset by gains and losses on the underlying transactions. These offsetting gains and
losses are not reflected in the above analysis. We are also exposed to interest rate changes affecting our investments in interest
rate sensitive instruments, which include our marketable debt securities, fixed-to-floating interest rate swap agreements, and
forward starting interest rate swap agreements. A sensitivity analysis of the impact on our interest rate sensitive financial
instruments of a hypothetical 10 basis point change in interest rates, compared to interest rates as of April 25, 2014, indicates
that the fair value of these instruments would correspondingly change by $75 million.
We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt securities
include U.S. government and agency securities, foreign government and agency securities, corporate debt securities, certificates
of deposit, mortgage-backed securities, other asset-backed securities, debt funds, and auction rate securities. For a discussion of
current market conditions and the impact on our financial condition and results of operations, please see the “Liquidity and
Capital Resources” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this Annual Report on Form 10-K.
For additional discussion of market risk, see Notes 5 and 9 to the consolidated financial statements in “Item 8. Financial
Statements and Supplementary Data” in this Annual Report on Form 10-K.
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