HP 2010 Annual Report Download - page 118

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
offset changes in certain liabilities related to deferred compensation arrangements. HP includes gains
or losses from changes in fair value of these securities, offset by losses or gains on the related
liabilities, in Interest and other, net, in HP’s Consolidated Statements of Earnings. The net losses
associated with these securities were $7 million and $14 million in fiscal years 2010 and 2009,
respectively.
Derivative Financial Instruments
HP is a global company that is exposed to foreign currency exchange rate fluctuations and interest
rate changes in the normal course of its business. As part of its risk management strategy, HP uses
derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total
return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures.
HP’s objective is to offset gains and losses resulting from these exposures with losses and gains on the
derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values
of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative
contracts for speculative purposes. HP designates its derivatives as fair value hedges, cash flow hedges
or hedges of the foreign currency exposure of a net investment in a foreign operation (‘‘net investment
hedges’’). Additionally, for derivatives not designated as hedging instruments, HP categorizes those
economic hedges as other derivatives. HP recognizes all derivatives, on a gross basis, in the
Consolidated Balance Sheets at fair value and reports them in Other current assets, Long-term
financing receivables and other assets, Other accrued liabilities, or Other liabilities. HP classifies cash
flows from the derivative programs as operating activities in the Consolidated Statements of Cash
Flows.
As a result of the use of derivative instruments, HP is exposed to the risk that counterparties to
derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit
risk, HP has a policy of only entering into contracts with carefully selected major financial institutions
based upon their credit ratings and other factors, and HP maintains dollar and term limits that
correspond to each institution’s credit rating. HP’s established policies and procedures for mitigating
credit risk on principal transactions and short-term cash include reviewing and establishing limits for
credit exposure and continually assessing the creditworthiness of counterparties. Master agreements
with counterparties include master netting arrangements as further mitigation of credit exposure to
counterparties. These arrangements permit HP to net amounts due from HP to a counterparty with
amounts due to HP from a counterparty, which reduces the maximum loss from credit risk in the event
of counterparty default.
Certain of HP’s derivative instruments contain credit-risk-related contingent features, such as a
provision whereby HP and the counterparties to the derivative instruments could request
collateralization on derivative instruments in net liability positions if HP’s or the counterparties’ credit
rating falls below certain thresholds. As of October 31, 2010 and October 31, 2009, HP was not
required to post any collateral, and HP did not have any derivative instruments with credit-risk-related
contingent features that were in a significant net liability position.
Fair Value Hedges
HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk.
HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses
110