Apple 2011 Annual Report Download - page 42

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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 U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the
Company’s cash, cash equivalents and marketable securities, the fair value of those securities, as well as costs associated with hedging.
The Company’
s investment policy and strategy are focused on preservation of capital and supporting the liquidity requirements of the Company.
A portion of the Company’s cash is managed by external managers within the guidelines of the Company’
s investment policy and to objective
market benchmarks. The Company’s internal portfolio is benchmarked against external manager performance.
The Company’s exposure to changes in interest rates relates primarily to the Company’
s investment portfolio. The Company typically invests in
highly rated securities and its policy generally limits the amount of credit exposure to any one issuer. The Company’
s investment policy
generally requires investments to be investment grade, with the objective of minimizing the potential risk of principal loss.
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 24, 2011, a hypothetical 100 basis point increase in interest
rates across all maturities would result in a $913 million incremental decline in the fair market value of the portfolio. As of September 25, 2010,
a similar 100 basis point shift in the yield curve would have resulted in a $477 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, will negatively affect the Company’
s net sales and gross margins as expressed in U.S. dollars. There is a risk
that the Company will have to adjust local currency product pricing due to competitive pressures when there have 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 up 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 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 thousands of random market price paths assuming normal market
conditions. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Company’
s foreign currency derivative
positions 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 $161 million as of September 24, 2011 compared to a
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