Apple 2015 Annual Report Download - page 38

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 and interest rate swaps, 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 of the gains
and losses related to these instruments 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
The Company’s exposure to changes in interest rates relates primarily to the Company’s investment portfolio and outstanding debt. While
the Company is exposed to global interest rate fluctuations, the Company’s interest income and expense are 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 and the fair value of those securities, as well as costs associated with hedging and interest paid on the Company’s
debt.
The Company’s investment policy and strategy are focused on preservation of capital and supporting the Company’s liquidity
requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its
investment objectives. 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 26, 2015 and September 27, 2014, a hypothetical 100 basis point increase in interest rates across all maturities would result
in a $4.3 billion and $3.4 billion incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized
if the Company sold the investments prior to maturity.
As of September 26, 2015 and September 27, 2014, the Company had outstanding floating- and fixed-rate notes with varying maturities
for an aggregate carrying amount of $56.0 billion and $29.0 billion, respectively. The Company has entered, and may enter in the future,
into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively
convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. Gains and losses on these
instruments are generally offset by the corresponding losses and gains on the related hedging instrument. A 100 basis point increase in
market interest rates would cause interest expense on the Company’s debt as of September 26, 2015 and September 27, 2014 to
increase by $200 million and $110 million on an annualized basis, respectively.
Further details regarding the Company’s debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial
Statements in Note 6, “Debt.”
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. In addition, the Company has entered, and may enter in the future, into non-designated foreign
currency contracts to partially offset the foreign currency exchange gains and losses on its foreign-denominated debt issuances. The
Company’s practice is to hedge a portion of its material foreign exchange exposures, typically for up to 12 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.
Apple Inc. | 2015 Form 10-K | 36