The Gap 2009 Annual Report Download - page 49

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate
fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for
foreign operations and forecasted royalty payments using foreign exchange forward contracts. We also use
forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations
for certain intercompany balances denominated in currencies other than the functional currency of the entity
holding the intercompany balance. These contracts are entered into with large, reputable financial institutions
that are monitored for counterparty risk. The principal currencies hedged against changes in the U.S. dollar during
fiscal 2009 were Euro, British pounds, Japanese yen, and Canadian dollars. Our use of derivative financial
instruments represents risk management; we do not use derivative financial instruments for trading purposes.
Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 8 of Notes to
Consolidated Financial Statements. The derivative financial instruments are recorded in the Consolidated Balance
Sheets at their fair value as of the balance sheet dates. As of January 30, 2010, we had foreign exchange forward
contracts outstanding to buy the notional amount of $695 million, 23 million British pounds, and 3 billion
Japanese yen.
We may also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to
offset the foreign currency translation and economic exposures related to our investment in the subsidiaries. At
January 30, 2010, we had foreign exchange forward contracts outstanding to hedge the net assets of our Japanese
subsidiary and Canadian subsidiaries in the notional amount of 2 billion Japanese yen and 81 million Canadian
dollars, respectively.
We have performed a sensitivity analysis as of January 30, 2010 based on a model that measures the impact of a
hypothetical 10 percent adverse change in the level of foreign currency exchange rates to U.S. dollars (with all other
variables held constant) on our underlying exposure, net of derivative financial instruments. The foreign currency
exchange rates used in the model were based on the spot rates in effect at January 30, 2010. The sensitivity
analysis indicated that a hypothetical 10 percent adverse movement in foreign currency exchange rates would
have an unfavorable impact on the underlying cash flow exposure, net of our foreign exchange derivative financial
instruments, of $30 million at January 30, 2010.
We invest in fixed and variable income investments classified as cash and cash equivalents and short-term
investments. Our cash and cash equivalents and short-term investments are placed primarily in money market
funds, domestic commercial paper, U.S. treasury bills, and bank deposits, and are classified as held-to-maturity
based on our positive intent and ability to hold the securities to maturity. These investments are stated at
amortized cost, which approximates market value due to the short maturities of these instruments. An increase in
interest rates of 10 percent would not have a material impact on the value of these investments. However, changes
in interest rates would impact the interest income derived from our investments. We earned interest income of $7
million in fiscal 2009.
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