Apple 2006 Annual Report Download - page 95

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3—Financial Instruments (Continued)
The following table shows the notional principal, net fair value, and credit risk amounts of the Company’s foreign currency instruments as of
September 30, 2006 and September 24, 2005 (in millions):
The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding as of year-end, and do
not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts shown in the table above represents the
Company’
s gross exposure to potential accounting loss on these transactions if all counterparties failed to perform according to the terms of the
contract, based on then-current currency exchange rates at each respective date. The Company’s exposure to credit loss and market risk will
vary over time as a function of currency exchange rates.
The estimates of fair value are based on applicable and commonly used pricing models and prevailing financial market information as of
September 30, 2006 and September 24, 2005. Although the table above reflects the notional principal, fair value, and credit risk amounts of the
Company’s foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the 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.
Foreign Exchange Risk Management
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risk
associated with existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in
foreign subsidiaries. Generally, the Company’s practice is to hedge a majority of its existing material foreign exchange transaction exposures.
However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of
hedging particular exposures, or limited availability of appropriate hedging instruments.
To help protect gross margins from fluctuations in foreign currency exchange rates, the Company’s U.S. dollar functional subsidiaries hedge a
portion of forecasted foreign currency revenue, and the Company’s non-U.S. dollar functional subsidiaries selling in local currencies hedge a
portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currency. Other comprehensive income
94
September 30, 2006
September 24, 2005
Notional
Principal
Fair
Value
Credit Risk
Amounts
Notional
Principal
Fair
Value
Creit Risk
Amounts
Foreign exchange instruments qualifying as
accounting hedges:
Spot/Forward contracts
$
351
$
6
$
6
$
662
$
10
$
10
Purchased options
$
1,256
$
9
$
9
$
1,668
$
17
$
17
Sold options
$
80
$
(1
)
$
—
$
1,087
$
(5
)
$
—
Foreign exchange instruments other than
accounting hedges:
Spot/Forward contracts
$
1,103
$
2
$
2
$
833
$
(3
)
$
1
Purchased options
$
167
$
1
$
—
$
115
$
—
$
—
Sold options
$
—
$
—
$
—
$
—
$
—
$
—