Apple 2004 Annual Report Download - page 60

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions and its interest rate swap and option positions, both on a
stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures. However, given the effective
horizons of the Company's risk management activities and the anticipatory nature of the exposures, there can be no assurance the hedges will
offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. In addition, the timing of
the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing
of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company's operating results and
financial position.
Interest Rate Risk
While the Company is exposed to interest rate fluctuations in many of the world's leading industrialized countries, the Company's interest
income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect
the interest earned on the Company's cash, cash equivalents, and short-
term investments as well as costs associated with foreign currency hedges.
The Company's short-term investment policy and strategy is to ensure the preservation of capital, meet liquidity requirements, and optimize
return in light of current credit and interest rate trends. The Company benchmarks its performance by utilizing external money managers to
manage a small portion of the aggregate investment portfolio. The external managers adhere to the Company's investment policies and also
provide occasional research and market information that supplements internal research used to make credit decisions in the investment process.
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company
places its short-term investments in highly liquid securities issued by high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company's general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting
market and credit risk. All highly liquid investments with maturities of three months or less are classified as cash equivalents; highly liquid
investments with maturities greater than three months are classified as short-term investments. As of September 25, 2004, approximately
$180 million of the Company's short-term investments had underlying maturities ranging from 1 to 5 years. As of September 27, 2003,
$629 million of the Company's investment portfolio classified as short-
term investments had maturities ranging from 1 to 5 years. The remainder
all had underlying maturities between 3 and 12 months. The Company may sell its investments prior to their stated maturities, due to liquidity
needs, in anticipation of credit deterioration, or for duration management. As a result of such activity, the Company recognized net gains of
$1 million in 2004, $21 million in 2003, and $7 million in 2002.
In order to provide a meaningful assessment of the interest rate risk associated with the Company's investment portfolio, the Company performed
a sensitivity analysis to determine the impact that a change in interest rates would have on the value of the investment portfolio assuming a 100
basis point parallel shift in the yield curve. Based on investment positions as of September 25, 2004, a hypothetical 100 basis point increase in
interest rates across all maturities would result in a $14.4 million decline in the fair market value of the portfolio. As of September 27, 2003, a
similar 100 basis point shift in the yield curve would have resulted in a $12.9 million decline in fair value. Such losses would only be realized if
the Company sold the investments prior to maturity. Except in instances noted above, the Company's policy is to hold investments to maturity.
From time to time, the Company has entered into interest rate derivative transactions with financial institutions in order to better match the
Company's floating-rate interest income on its cash equivalents
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