Apple 2005 Annual Report Download - page 59

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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 the current credit and interest rate environment. 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 24, 2005, approximately
$287 million of the Company’s short-term investments had underlying maturities ranging from 1 to 5 years. As of September 25, 2004, $180
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. The Company recognized a net loss before taxes of $137,000 in
2005, and net gains before taxes of $1 million and $21 million in 2004, and 2003, respectively as a result of such sales.
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 24, 2005, a hypothetical 100 basis
point increase in interest rates across all maturities would result in a $19.9 million decline in the fair market value of the portfolio. As of
September 25, 2004, a similar 100 basis point shift in the yield curve would have resulted in a $14.4 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.
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