Dell 2004 Annual Report Download - page 49

Table of Contents
Foreign Currency Instruments
Dell uses purchased option contracts and forward contracts designated as cash flow hedges to protect against the foreign currency exchange
risk inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. Hedged transactions include international sales
by U.S. dollar functional currency entities, foreign currency denominated purchases of certain components and intercompany shipments to
some international subsidiaries. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts.
The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the
time it is settled. These contracts generally expire in twelve months or less.
Dell also uses forward contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a foreign
currency. These contracts are not designated as hedging instruments under GAAP, and therefore, the change in the instrument's fair value is
recognized currently in earnings and is reported as a component of investment and other income, net. The change in the fair value of these
instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and
liabilities due to movements in currency exchange rates. These contracts generally expire in three months or less.
If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is initially deferred in
other comprehensive income. These amounts are subsequently recognized in income as a component of net revenue or cost of revenue in the
same period the hedged transaction affects earnings. The ineffective portion of the change in the fair value of cash flow hedge is recognized
currently in earnings and is reported as a component of investment and other income, net. Hedge effectiveness is measured by comparing the
hedging instrument's cumulative change in fair value from inception to maturity to the forecasted transaction's terminal value. During fiscal
years 2005, 2004, and 2003, Dell did not discontinue any cash flow hedges as substantially all forecasted foreign currency transactions were
realized in Dell's actual results. Furthermore, hedge ineffectiveness was not material.
At January 28, 2005, Dell held purchased option contracts with a notional amount of approximately $2.0 billion, a net asset value of $53 million
and a net unrealized deferred loss of $52 million, net of taxes. At January 28, 2005, Dell held forward contracts with a notional amount of
approximately $3.0 billion, a net liability value of $146 million and a net unrealized gain of $21 million, net of taxes.
At January 30, 2004, Dell held purchased option contracts with a notional amount of approximately $2.0 billion, a net asset value of $41 million
and a net unrealized deferred loss of $58 million, net of taxes. At January 30, 2004, Dell held forward contracts with a notional amount of
approximately $3.0 billion, a net liability value of $185 million and a net unrealized loss of $24 million, net of taxes.
Long-Term Debt and Interest Rate Risk Management
In April 1998, Dell issued $200 million 6.55% fixed rate senior notes due April 15, 2008 (the "Senior Notes") and $300 million 7.10% fixed rate
senior debentures due April 15, 2028 (the "Senior Debentures"). Interest on the Senior Notes and Senior Debentures is paid semi-annually, on
April 15 and October 15. The Senior Notes and Senior Debentures rank pari passu and are redeemable, in whole or in part, at the election of
Dell for principal, any accrued interest and a redemption premium based on the present value of interest to be paid over the term of the debt
agreements. The Senior Notes and Senior Debentures generally contain no restrictive covenants, other than a limitation on liens on Dell's
assets and a limitation on sale-leaseback transactions.
Concurrent with the issuance of the Senior Notes and Senior Debentures, Dell entered into interest rate swap agreements converting Dell's
interest rate exposure from a fixed rate to a floating rate basis to better align the associated interest rate characteristics to its cash and
investments portfolio. The interest rate swap agreements have an aggregate notional amount of $200 million maturing
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