Microsoft 2009 Annual Report Download - page 53

PAGE 53
EQUITY
Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is
managed relative to broad-based global and domestic equity indices using certain convertible preferred investments,
options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price
risk, we may use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and
forwards. As of June 30, 2009, the total notional amounts of designated and non-designated equity contracts
purchased and sold were immaterial.
INTEREST RATE
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their various
maturities. The average maturity of the fixed-income portfolio is managed to achieve economic returns which
correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-
the-counter swap and option contracts, none of which are designated as hedging instruments. As of June 30, 2009,
the total notional amount of fixed-interest rate contracts purchased and sold were $2.7 billion and $456 million,
respectively. In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to
gain exposure to agency and mortgage-backed securities. These meet the definition of a derivative instrument under
SFAS No. 133 in cases where physical delivery of the assets is not taken at the earliest available delivery date. As of
June 30, 2009, the total notional derivative amount of mortgage contracts purchased was $1.3 billion.
CREDIT
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default
swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices
and facilitate portfolio diversification. We use credit default swaps as they are a low cost way of managing exposure
to individual credit risks or groups of credit risks while continuing to improve liquidity. As of June 30, 2009, the total
notional amounts of credit contracts purchased and sold were immaterial.
COMMODITY
We use broad-based commodity exposures to enhance portfolio returns and facilitate portfolio diversification. We
use swap and futures contracts, not designated as hedging instruments, to generate and manage exposures to
broad-based commodity indices. We use derivatives on commodities as they are low-cost alternatives to the
purchase and storage of a variety of commodities, including, but not limited to, precious metals, energy, and grain.
As of June 30, 2009, the total notional amounts of commodity contracts purchased and sold were $543 million and
$33 million, respectively.
CREDIT-RISK-RELATED CONTINGENT FEATURES
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and
outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain a
minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, collateral will be required for
posting, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2009, our long-
term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral
is required to be posted.