eTrade 2000 Annual Report Download - page 62

includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a
result of certain factors, including those set forth in the section entitled “Risk factors” and elsewhere in this filing.
Domestic Retail Brokerage, Global and Institutional, and Asset Gathering and Other
Our domestic retail brokerage, global and institutional, and asset gathering and other operations are exposed to market risk related to
changes in interest rates, foreign currency exchange rates and equity security price risk. However, we do not believe any such
exposures are material. To reduce certain risks, we utilize derivative financial instruments; however, we do not hold derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity
During the quarter ended September 30, 2000, we had a variable rate bank line of credit. As of September 30, 2000, we had $22.2
million outstanding under this line. The line of credit and the monthly interest payment are subject to interest rate risk. If market
interest rates were to increase immediately and uniformly by 100 basis points at September 30, 2000, the interest payments would
increase by an immaterial amount.
A portion of our investment portfolio is comprised of corporate bonds and U.S. Government obligations. As of September 30, 2000,
the fair value of our debt investments was $313.7 million. If market interest rates were to increase immediately and uniformly by 100
basis points at September 30, 2000, the fair value of these debt investments would decrease by an immaterial amount.
Foreign Currency Exchange Risk
A portion of our operations consist of brokerage and investment services outside of the United States. As a result, our results of
operations could be adversely affected by factors such as changes in foreign currency exchange rates or economic conditions in the
foreign markets in which we provide our services. We are primarily exposed to changes in exchange rates on the Japanese yen, the
British pound and the Euro. When the U.S. dollar strengthens against these currencies, the U.S. dollar value of non-U.S. dollar-based
revenues decreases. When the U.S. dollar weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based revenues
increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases
when the U.S. dollar strengthens. We are a net payer of British pounds and, as such, benefit from a stronger dollar, and are adversely
affected by a weaker dollar relative to the British pound. However, we are a net receiver of currencies other than British pounds, and
as such, benefit from a weaker dollar, and are adversely affected by a stronger dollar relative to these currencies. Accordingly, changes
in exchange rates may adversely affect our consolidated sales and operating margins as expressed in U.S. dollars.
To mitigate the short-term effect of changes in currency exchange rates on our non-U.S. dollar-based revenues and operating expenses,
we routinely hedge our material net non-U.S. dollar-based exposures by entering into foreign exchange forward and option contracts.
Currently, hedges of transactions do not extend beyond twelve months and are immaterial. Given the short-term nature of our foreign
exchange forward and option contracts, our exposure to risk associated with currency market movement on the instruments is not
material.
66
Equity Price Risk
We have investments in publicly-traded equity securities which, in conjunction with cash provided from operations and financing
arrangements, are utilized to meet forecasted liquidity needs. The fair value of these securities at September 30, 2000 was $219.7
million. As a result of significant market volatility during the year ended September 30, 2000, the fair value of our equity portfolio was
subjected to significant fluctuations. As we account for these securities as available-for-sale, unrealized gains and losses resulting from
changes in the fair value of these securities are reflected as a change in shareowners’ equity, and not reflected in the determination of
operating results until the securities are sold. Depreciation in the market value of our portfolio impacts our financing strategies which
could result in higher interest expense if alternative financing strategies are used. At September 30, 2000, unrealized gains on these
securities were $186.3 million.
Financial Instruments
For our working capital and reserves, which are required to be segregated under Federal or other regulations, we primarily invest in
money market funds, resale agreements, certificates of deposit, and commercial paper. Money market funds do not have maturity dates
and do not present a material market risk. The other financial instruments are fixed rate investments with short maturities and do not
present a material interest rate risk.
2002. EDGAR Online, Inc.