Apple 1998 Annual Report Download - page 47

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together
with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The interest rate swaps which qualify as accounting hedges generally require the Company to pay a floating interest rate based on the three- or
six-month U.S. dollar LIBOR and receive a fixed rate of interest without exchanges of the underlying notional amounts. As a result, these
swaps effectively convert the Company's fixed-rate 10 year debt to floating-
rate debt and generally qualify for hedge accounting treatment. The
maturity date for these swaps is in February 2001. As of September 25, 1998, and September 26, 1997, interest rate swaps classified as receive-
fixed swaps had a weighted-average receive rate of 6.04%. Weighted-
average pay rates on these swaps were 5.73% and 5.66% as of September
25, 1998, and September 26, 1997, respectively. The unrealized gains and losses on these swaps are deferred and recognized in income as a
component of interest and other income (expense), net in the same period as the hedged transaction. Deferred gains on such contracts totaled
approximately $7 million as of September 25, 1998, and deferred losses totaled approximately $4 million as of September 26, 1997.
Interest rate collars limit the Company's exposure to fluctuations in short-term interest rates by locking in a range of interest rates. An interest
rate collar is a no-cost structure that consists of a purchased option and a sold option. The Company receives a payment when the three-month
LIBOR falls below predetermined levels, and makes a payment when the three-month LIBOR rises above predetermined levels. There were no
interest rate collars outstanding as of September 25, 1998.
Purchased floors limit the Company's exposure to falling interest rates on its cash equivalents and short-term investments by locking in a
minimum interest rate. The Company receives a payment when interest rates fall below a predetermined level. A purchased floor generally
qualifies for hedge accounting treatment and is reported on the balance sheet at its premium cost, which is amortized over the life of the floor.
The purchased floors are generally designated and effective as hedges against interest rate risk on the Company's securities classified as
available-for-sale and are carried at fair value in other current liabilities with the unrealized gains and losses recorded as a component of
shareholders' equity. Gains and losses are recognized in income as a component of interest and other income (expense), net in the same period
as the hedged transaction. Unrealized gains and losses on such contracts were immaterial as of September 25, 1998, and September 26, 1997.
The foreign exchange forward contracts not accounted for as hedges are carried at fair value in other current liabilities with the gains and losses
recorded currently in income as a component of interest and other income (expense), net. The foreign exchange forward contracts that are
designated and effective as hedges are also carried at fair value in other current liabilities with gains and losses recorded currently in income as
a component of interest and other income (expense), net, against the losses and gains on the hedged transactions. As of September 25, 1998, all
foreign exchange forward contracts held by the Company mature within six months.
If the option contract is designated and effective as a hedge of a firmly committed transaction, or a probable but not firmly committed
transaction, then any gain or loss is deferred until the occurrence of the hedged transaction. Deferred gains and losses on such contracts were
immaterial as of September 25, 1998, and September 26, 1997. If the option contract is used to hedge an asset or liability, then the option is
carried at fair value in other current liabilities with the gains and losses recorded currently in income as a component of interest and other
income (expense), net, against the losses and gains on the hedged transaction. As of September 25, 1998, maturity dates for purchased foreign
exchange option contracts ranged from 1 to 12 months, and maturity dates for sold option contracts ranged from 1 to 6 months.
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