THQ 2009 Annual Report Download - page 58

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ARS are presently at risk or that the underlying credit quality of the assets backing our ARS has been
impacted by the reduced liquidity of these investments. We have continued to receive interest payments on
the ARS according to their terms. See ‘‘Note 2—Investment Securities’’ in the notes to the consolidated
financial statements for further information related to our investments.
As of March 31, 2009, we had no outstanding letters of credit.
Foreign Currency Exchange Rate Risk
We transact business in many different foreign currencies and are exposed to financial market risk
resulting from fluctuations in foreign currency exchange rates, particularly the GBP and the Euro, which
may result in a gain or loss of earnings to us. Our international business is subject to risks typical of an
international business, including, but not limited to, foreign currency exchange rate volatility. Accordingly,
our future results could be materially and adversely affected by changes in foreign currency exchange rates.
Throughout the year, we frequently monitor the volatility of the GBP and the Euro (and all other
applicable currencies).
Cash Flow Hedging Activities. From time to time, we hedge a portion of our foreign currency risk related
to forecasted foreign currency denominated sales and expense transactions by entering into option
contracts that generally have maturities less than 90 days. Our hedging programs reduce, but do not
entirely eliminate, the impact of currency exchange rate movements in revenue and operating expenses.
There were no such contracts purchased during fiscal 2009.
Balance Sheet Hedging Activities. We utilize foreign exchange forward contracts to mitigate foreign
currency risk associated with foreign currency-denominated assets and liabilities, primarily certain inter-
company receivables and payables. Our foreign exchange forward contracts are not designated as hedging
instruments under SFAS No. 133 and are accounted for as derivatives whereby the fair value of the
contracts are reported as other current assets or other current liabilities in our consolidated balance sheets,
and the associated gains and losses from changes in fair value are reported in interest and other income,
net in the consolidated statements of operations. The forward contracts generally have a contractual term
of one month or less and are transacted near month-end. Therefore, the fair value of the forward contracts
generally is not significant at each month-end.
Foreign exchange forward contracts are designed to offset gains and losses on the underlying foreign
currency denominated assets and liabilities. Any movement in foreign currency exchange rates resulting in
a gain or loss on our foreign exchange forward contracts would be offset by an opposing gain or loss in the
underlying foreign currency denominated assets and liabilities that were hedged and would not have a
material impact on our financial position. As of March 31, 2009, we had foreign exchange forward
contracts in the notional amount of $67.2 million, all with maturities of one month, consisting primarily of
the Euro, GBP, and AUD.
The counterparties to these forward contracts are creditworthy multinational commercial and investment
banks. The risks of counterparty non-performance associated with these contracts are not considered to be
material. Notwithstanding our efforts to manage foreign exchange risks, there can be no assurances that
our mitigating or hedging activities will adequately protect us against the risks associated with foreign
currency fluctuations.
We do not hedge foreign currency translation risk. A hypothetical 10% adverse change in exchange rates
would result in a reduction of reported net sales of approximately $37.3 million and a reduction of
reported income before taxes of approximately $0.8 million. A hypothetical 10% adverse change in
exchange rates would result in a reduction of reported total assets of approximately $12.7 million. These
estimates assume an adverse shift in all foreign currency exchange rates, which do not always move in the
same direction; actual results may differ materially.
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