Quantitative and Qualitative Disclosures about Market Risk
We maintain an investment portfolio of various holdings, types, and
maturities. These securities are generally classified as available
for sale and, consequently, are recorded on the Consolidated Balance
Sheets at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss),
net of tax. Part of this portfolio includes equity investments in
several publicly traded companies, the values of which are subject
to market price volatility. During fiscal 2002, the net change in
unrealized gains and losses on investments included as a separate
component of comprehensive income was $224 million primarily due to
the recognition of a charge of $858 million, pre-tax, in the first
quarter attributable to the impairment of certain publicly traded
equity securities, partially offset by a net decrease of approximately
$500 million in the fair value of investments (see Note 9 to the Consolidated
Financial Statements). The impairment charge was related to the decline
in the fair value of our publicly traded equity investments below
their cost basis that was judged to be other-than-temporary.
At any time, a rise in interest rates could have a material adverse
impact on the fair value of our investment portfolio. Conversely,
declines in interest rates could have a material impact on interest
earnings of our investment portfolio. We do not currently hedge these
interest rate exposures.
We have also invested in several privately held companies, many of
which can still be considered in the start-up or development stages.
These investments are inherently risky as the markets for the technologies
or products they have under development are typically in the early
stages and may never materialize. We could lose our entire initial
investment in these companies. As of July 27, 2002, these investments
decreased to $477 million from $775 million at July 28, 2001 primarily
due to additional provisions for losses.
Investments
The following table presents the hypothetical changes in fair value
of the financial instruments held at July 27, 2002 that are sensitive
to changes in interest rates (in millions):
These instruments are not leveraged and are held for purposes other
than trading. The modeling technique used measures the change in fair
value arising from selected potential changes in interest rates. Market
changes reflect immediate hypothetical parallel shifts in the yield
curve of plus or minus 50 basis points ("BPS"), 100 BPS,
and 150 BPS, which are representative of the historical movements
in the Federal Funds Rate.
The following table presents the hypothetical changes in fair value
of public equity investments that are sensitive to changes in the
stock market (in millions):
Our equity portfolio consists of securities with characteristics that
most closely match the S&P Index or companies traded on the Nasdaq
National Market. These equity securities are held for purposes other
than trading. The modeling technique used measures the hypothetical
change in fair value arising from selected hypothetical changes in
each stock's price. Stock price fluctuations of plus or minus 25%,
50%, and 75% were selected based on the probability of their occurrence
and are representative of the historical movements in the Nasdaq Composite
Index.
Derivative Instruments
We enter into foreign exchange forward contracts to minimize the short-term
impact of foreign currency fluctuations on certain foreign currency
receivables, investments, and payables primarily denominated in Australian,
Canadian, Japanese, Korean, and several European currencies, including
the euro and British pound. We also periodically hedge foreign currency
forecasted transactions related to certain operating expenses with
currency options. Foreign exchange forward and option contracts as
of July 27, 2002 are summarized as follows (in millions):
Our foreign exchange forward contracts related to current assets and
liabilities generally range from one to three months in original maturity.
Additionally, we have entered into foreign exchange forward contracts
related to long-term customer financings with maturities of up to
two years. The foreign exchange contracts related to investments generally
have maturities of less than one year. Currency option contracts generally
have maturities of less than one year. We do not enter into foreign
exchange forward and option contracts for trading purposes. We do
not expect gains or losses on these derivative instruments to have
a material impact on our financial results or financial condition
(see Note 8 to the Consolidated Financial Statements).
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