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Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including maintenance of a minimum
interest coverage ratio. Dell was in compliance with the financial covenant as of January 28, 2011. There were no outstanding advances
under the revolving credit facilities as of January 28, 2011.
NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Instruments
As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and purchased options, to hedge
certain foreign currency exposures and interest rate swaps to manage the exposure of its debt portfolio to interest rate risk, as Dell issues
long-term debt based on market conditions at the time of financing. Dell's objective is to offset gains and losses resulting from these
exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and
protecting fair values of assets and liabilities. Dell assesses hedge effectiveness both at the onset of the hedge and at regular intervals
throughout the life of the derivative and recognizes any ineffective portion of the hedge, as well as amounts not included in the
assessment of effectiveness, in earnings as a component of interest and other, net.
Foreign Exchange Risk
Dell uses a combination of forward contracts and purchased options designated as cash flow hedges to protect against the foreign
currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. 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. The majority of
these contracts typically expire in 12 months or less. As of January 28, 2011, and January 29, 2010, the total notional amount of foreign
currency option and forward contracts designated as cash flow hedges was $5.4 billion and $4.2 billion, respectively.
Dell assessed hedge ineffectiveness for cash flow hedges for the fiscal year ended January 28, 2011 and determined that it was not
material. During the fiscal year ended January 28, 2011, Dell did not discontinue any cash flow hedges that had a material impact on
Dell's results of operations, as substantially all forecasted foreign currency transactions were realized in Dell's actual results.
In addition, Dell uses forward contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a
foreign currency. These contracts generally expire in three months or less, are considered economic hedges and are not designated. 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. Dell recognized gains of $59 million during
Fiscal 2011, losses of $85 million during Fiscal 2010, and gains of $189 million during Fiscal 2009, for the change in fair value of these
foreign currency forward contracts. As of January 28, 2011, and January 29, 2010, the total notional amount of other foreign currency
forward contracts not designated as hedges was $250 million and $20 million, respectively.
Interest Rate Risk
Dell uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The
interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying
fixed rate being received on fixed term customer leases and loans. The duration of these contracts typically ranges from 30 to 42 months.
Certain of these swaps are designated as cash flow hedges. As of January 28, 2011, the total notional amount of interest rate swaps
associated with structured financing debt was $770 million, of which the notional amount designated as cash flows hedges was
$625 million. Hedge ineffectiveness for interest rate swaps designated as cash flow hedges was not material for the fiscal year ended
January 28, 2011.
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