Apple 2012 Annual Report Download - page 41

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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, both on a stand-alone basis
and in conjunction with its underlying foreign currency and interest rate related exposures. Given the effective
horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be
no assurance these positions will offset more than a portion of the financial impact resulting from movements in
either foreign exchange or interest rates. Further, the recognition timing of gains and losses related to these
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 financial condition and operating results.
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 investment policy generally limits the amount of
credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the
primary 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 29, 2012, a hypothetical 100 basis point increase in interest rates across all
maturities would result in a $2.1 billion incremental decline in the fair market value of the portfolio. As of
September 24, 2011, a similar 100 basis point shift in the yield curve would result in a $913 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.
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