Apple 1998 Annual Report Download - page 30

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FOREIGN CURRENCY RISK
Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely
affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening
of the U.S. dollar, may negatively affect the Company's consolidated sales and gross margins as expressed in U.S. dollars.
The Company enters into foreign exchange forward and option contracts with financial institutions primarily to protect against currency
exchange risks associated with existing assets and liabilities, certain firmly committed transactions, and probable but not firmly committed
transactions. The Company's foreign exchange risk management policy requires it to hedge a majority of its existing material foreign exchange
transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures that are immaterial either in
terms of their minimal U.S. dollar value or in terms of the related currency's historically high correlation with the U.S. dollar. Foreign exchange
forward contracts are carried at fair value in other current liabilities. The premium costs of purchased foreign exchange option contracts are
recorded in other current assets and amortized over the life of the option.
Probable but not firmly committed transactions comprise sales of the Company's products and purchases of raw material in currencies other
than the functional currency. A majority of these sales are made through the Company's subsidiaries in Europe, Asia (particularly Japan),
Canada, and Australia. The Company purchases foreign exchange option contracts to hedge the currency exchange risks associated with these
probable but not firmly committed transactions. The Company also sells foreign exchange option contracts, in order to partially finance the
purchase of these foreign exchange option contracts. Although the Company entered into no such transactions in fiscal 1998, the Company
occasionally enters into other foreign exchange transactions, which are intended to reduce the costs associated with its foreign exchange risk
management programs. The duration of foreign exchange hedging instruments, whether for firmly committed transactions, for probable but not
firmly committed transactions, or to partially finance the foreign currency risk management program, currently does not exceed one year.
Gains and losses on accounting hedges of existing assets or liabilities are generally recorded currently in income or shareholders' equity against
the losses and gains on the hedged transactions. Gains and losses related to qualifying accounting hedges of firmly committed or probable but
not firmly committed transactions are deferred and recognized in income in the same period as the hedged transactions. Gains and losses on
foreign exchange instruments not accounted for as hedges are recorded currently in income as a component of interest and other income
(expense), net.
The following table provides information about the Company's foreign currency derivative financial instruments outstanding as of September
25, 1998. The information is provided in U.S. dollar amounts, as presented in the Company's consolidated financial statements. For foreign
currency exchange contracts, the table presents the notional amount (at contract exchange rates) and the weighted-average contractual foreign
currency exchange rates. Generally, all instruments mature within 6 months. The German mark is used as a proxy for the eleven currencies
which will participate in the Euro as of January 1, 1999. In
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