Apple 2009 Annual Report Download - page 56

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Table of Contents
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, will 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 certain 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, typically for three to
six months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not
limited to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures.
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 $44 million as
of September 26, 2009 compared to a maximum one-
day loss in fair value of $60 million as of September 27, 2008. 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 26, 2009 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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