Intel 2003 Annual Report Download - page 63

Table of Contents
Index to Financial Statements
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Currency Risk. The company transacts business in various currencies other than the U.S. dollar, primarily the Euro and certain other
European and Asian currencies. The company has established balance sheet and forecasted transaction risk management programs to protect
against reductions in fair value and volatility of future cash flows caused by changes in exchange rates. The forecasted transaction risk
management program includes anticipated transactions such as operating costs and expenses and capital purchases. The company may use
currency forward contracts, currency options, currency interest rate swaps and currency borrowings in these risk management programs. These
programs reduce, but do not always entirely eliminate, the impact of currency exchange movements.
Currency forward contracts and currency options that are used to hedge exposures to variability in anticipated non-U.S.-dollar-
denominated cash flows are designated as cash flow hedges. The maturities of these instruments are generally less than 24 months. For these
derivatives, the gain or loss from the effective portion of the hedge is reported as a component of other comprehensive income in stockholders’
equity and is reclassified into earnings in the same period or periods in which the hedged transaction affects earnings, and within the same
income statement line item as the impact of the hedged transaction. The gain or loss from the ineffective portion of the hedge in excess of the
cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in interest and other, net during the period
of change.
Currency interest rate swaps and currency forward contracts are used to offset the currency risk of non-U.S.-dollar-denominated debt
securities classified as trading assets, as well as other assets and liabilities denominated in various currencies. The maturities of these
instruments are generally less than 12 months, except for derivatives hedging equity investments, which are generally five years or less.
Changes in fair value of the underlying assets and liabilities are generally offset by the changes in fair value of the related derivatives, with the
resulting net gain or loss, if any, recorded in interest and other, net.
Interest Rate Risk. The company’
s primary objective for holding investments in debt securities is to preserve principal while maximizing
yields, without significantly increasing risk. To achieve this objective, the returns on a substantial majority of the company
’s investments in
long-term fixed-rate marketable debt securities are swapped to U.S. dollar LIBOR-
based returns, using interest rate swaps and currency interest
rate swaps in transactions that are not designated as hedges for accounting purposes. The floating interest rates on the swaps are reset on a
monthly, quarterly or semiannual basis. Changes in fair value of the debt securities classified as trading assets are generally offset by changes
in fair value of the related derivatives, resulting in negligible net impact. The net gain or loss, if any, is recorded in interest and other, net.
The company may also enter into interest rate swap agreements to modify the interest characteristics of a portion of its outstanding long-
term debt. These transactions are designated as fair value hedges. The gains or losses from the changes in fair value of the interest rate swaps,
as well as the offsetting change in the hedged fair value of the long-term debt, are recognized in interest expense.
Equity Market Risk. The company may enter into transactions designated as fair value hedges using equity options, swaps or forward
contracts to hedge the equity market risk of marketable securities in its portfolio of strategic equity investments once the securities are no
longer considered to have strategic value. The gain or loss from the change in fair value of these equity derivatives, as well as the offsetting
change in hedged fair value of the underlying equity securities, are recognized currently in gains (losses) on equity securities, net. The company
may use equity derivatives in transactions not designated as hedges to offset the change in fair value of certain equity securities classified as
trading assets. The company may or may not enter into transactions to reduce or eliminate the market risks of its investments in strategic equity
derivatives, including warrants.
Measurement of Effectiveness of Hedge Relationships.
For currency forward contracts, effectiveness of the hedge is measured using spot
rates for hedging strategies related to long-term capital purchases, and using forward rates for all other strategies, to value the forward contract
and the underlying hedged transaction. For currency options and equity options, effectiveness is measured by the change in the option’s
intrinsic value, which represents the change from the spot price of the underlying hedged transaction compared to the option’s strike price.
Changes in time value of these options are not included in the assessment of effectiveness. For interest rate swaps, effectiveness is measured by
offsetting the change in fair value of the long-term debt with the change in fair value of the interest rate swap.
Any ineffective portion of the hedges, as well as amounts not included in the assessment of effectiveness, are recognized currently in
interest and other, net or in gains (losses) on equity securities, net, depending on the nature of the underlying asset or liability. If a
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