Apple 2007 Annual Report Download - page 57

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 initial maturities of three months or less at the date of purchase are classified as cash equivalents; highly liquid investments
with initial maturities greater than three months at the date of purchase are classified as short-term investments. As of September 29, 2007,
$1.9 billion of the Company's short-term investments had underlying maturities ranging from 1 to 5 years. The remainder all had underlying
maturities of less than 12 months. The Company may sell its investments prior to their stated maturities for strategic purposes, in anticipation of
credit deterioration, or for duration management. The Company recognized net gains before taxes on short-term investments of approximately
$474,000 in 2007 and net losses before taxes of approximately $434,000 and $137,000 in 2006 and 2005, respectively.
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 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 29, 2007, a hypothetical 100 basis point increase in interest
rates across all maturities would result in $16 million incremental decline in the fair market value of the portfolio. As of September 30, 2006, a
similar 100 basis point shift in the yield curve would have resulted in a $15 million incremental decline in the fair market value of the portfolio.
Such losses would only be realized if the Company sold the investments prior to maturity.
Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. dollar, may negatively affect the Company's net sales and gross margins as expressed in U.S. dollars. There is also a
risk that the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility
in foreign currency exchange rates.
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks
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 material foreign exchange exposures. However, the Company may
choose not to hedge certain foreign exchange exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and/or
limited availability of appropriate hedging instruments.
To provide a meaningful assessment of the foreign currency risk associated with certain of the Company's foreign currency derivative positions,
the Company performed a sensitivity analysis using a value-at-risk ("VAR") model to assess the potential impact of fluctuations in exchange
rates. The VAR model consisted of using a Monte Carlo simulation to generate 3,000 random market price paths. The VAR is the maximum
expected loss in fair value, for a given confidence interval, to the Company's foreign exchange portfolio due to adverse movements in rates. The
VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. The model assumes normal market
conditions. Forecasted transactions, firm commitments, and assets and liabilities denominated in foreign currencies were excluded from the
model. Based on the results of the model, the Company estimates with 95% confidence a maximum one-
day loss in fair value of $12.8 million as
of September 29, 2007 compared to a maximum one-day loss of $9.2 million as of September 30, 2006. Because the Company uses foreign
currency instruments for hedging purposes, losses incurred on those instruments are generally offset by increases in the fair value of the
underlying exposures.
Actual future gains and losses associated with the Company's investment portfolio and derivative positions may differ materially from the
sensitivity analyses performed as of September 29, 2007 due to the inherent limitations associated with predicting the changes in the timing and
amount of interest rates, foreign currency exchanges rates, and the Company's actual exposures and positions.
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